NEW YORK – J.P. Morgan Chase & Co. (JPM) eased investors' concerns about potential legal costs even as it posted a hefty quarterly loss on Wednesday, sending shares of the No. 2 U.S. bank up as much as 3.6 percent.
The bank, which just took over Bank One Corp., put aside an additional $2.3 billion for litigation related to advising WorldCom (search) and Enron (search) before their fall. It also set a $6 billion stock repurchase program.
New York-based J.P. Morgan, which gained a major presence in the Southwest and Midwest with its purchase of Chicago-based Bank One, reported a net loss of $548 million, or 27 cents per share, compared with a profit of $1.83 billion, or 89 cents a share a year ago.
Excluding the litigation charge and $60 million of merger costs, the bank said profit fell from a year ago to $1.81 billion, or 85 cents per share, which still topped estimates by 2 cents a share.
A 32 percent drop in investment bank profit, to $703 million, hurt earnings as trading revenue especially in uncertain equity markets fell sharply.
However, J.P. Morgan said the takeover of Bank One meant approximately $800 million more in savings than previously estimated, and said 2,000 more jobs would be cut.
Although a quarterly loss is usually not welcomed by stock traders, the charge was seen as a step to put the cost of its recent legal problems behind it.
"The rise in the stock price today is a sigh of relief that the anticipated losses were not even larger," said David Dreman, Chairman and Chief Investment Officer of Dreman Value Management, in Jersey City, N.J..
Analysts have said the bank faces around $1 billion in potential legal costs from its dealings with telecoms company WorldCom, and an even larger amount for Enron in light of its close relationship with the energy company. Reserves for legal costs now stand at $4.7 billion.
"They are wiping the slate clean," said Todd Buechs, an analyst with Bernstein & Co. of the increased reserves, adding that one-time charge removes a lot of uncertainty surrounding the stock.
In May, Citigroup Inc. (C) said it would pay $2.65 billion to WorldCom investors who had accused it of participating in financial fraud.
The merger of J.P. Morgan and Chicago-based Bank One, which closed on July 1, will increase the New York bank's retail banking revenue and possibly smooth out the volatility in the bank's earnings from its investment bank.
Included in the J.P. Morgan report, Bank One reported its last results as a stand-alone bank, saying it earned $1.1 billion in the second-quarter, compared with $856 million last year. Growth in checking accounts, deposits, lending and investment sales pushed profits higher.
Estimates for savings from the merger were increased to $3 billion from $2.2 billion with two-thirds of that in place by 2005. Merger costs are now estimated to be $4 billion.
The firm also increased the number of merger-related job cuts to 12,000 from 10,000.
J.P. Morgan added that it sees charging $3 billion of merger costs on income over the next three years, starting in the third-quarter.
The merger, one of the largest financial combinations in U.S. history, expands the Chase name to retail branches well beyond its Northeastern territory.
The Chase name will cover 2,300 branches in 17 states, more than 11 million retail banking customers, 850,000 small businesses, 31,000 commercial businesses and 87 million credit cards.
J.P. Morgan shares were up 97 cents to $37.37 in afternoon trading on the New York Stock Exchange after rising as high as $37.70.