Under Fire in Washington, J.P. Morgan Chase & Co. (NYSE: JPM) Reports 55% Increase in Profits

J.P. Morgan Chase (JPM) reported a 1^st quarter profit of $3.3 billion, an increase of 55% from a year earlier.

The improving economy left its mark on the bank’s first-quarter earnings, as delinquencies continued to decline and the company had to set aside less money for bad loans.

“There is clear and broad based improvement” in the economy in the U.S. and around the world, possibly resulting in a “strong recovery,” J.P. Morgan Chairman and Chief Executive Jamie Dimon said in a conference call with reporters. “Chances of a double dip [recession] are rapidly going away.”

As expected, the economic recovery is mainly felt in fewer bad loans, rather than new good loans; loan demand remained sluggish. J.P. Morgan reduced its reserve for future loan losses in investment banking and credit cards, but added to its reserve for mortgages.

Losses from consumer loans might come in lower than previously expected, but Chief Financial Officer Michael Cavanagh said, “What we are seeing is some leveling out of delinquencies,” which is one step further than the mere stabilization of delinquencies that the bank had seen late last year. The improvement may not be enough to lift J.P. Morgan’s credit-card business out of losses, but Mr. Dimon said it might become profitable by the end of the year.

Overall, the bank’s earnings benefited from strong revenue from fixed-income and equity trading. Revenue at the investment-banking division rose 69% from the fourth quarter and earnings were up 30% from the previous quarter.

But J.P. Morgan’s consumer business remained volatile. Revenue in retail banking and credit cards were up slightly from the fourth quarter, though both divisions remained unprofitable. Commercial lending and asset management continued to do well. Overall, revenue on a managed basis, which includes securitized loans, rose 5% from a year earlier and 12% from the fourth quarter, to $28 billion, though the bank’s overall profit increased only slightly from the fourth quarter.

The positive earnings report comes just two weeks after learning that the Federal Deposit Insurance Corp. (FDIC) was backing away from its support for a $1.4 billion tax break for J.P. Morgan.

The tax benefit stems from J.P. Morgan’s acquisition of Washington Mutual and is part of the bankruptcy proceedings of the failed Seattle thrift’s parent company. The refund is based on a 2009 economic stimulus bill that allowed companies to apply losses from 2008 and 2009 against taxes paid in the previous five years.

Critics argue that J.P.Morgan should be ineligible for the refund since the bill specifically excluded companies that received bank-bailout funds from getting the refund.

J.P. Morgan has said to other parties that the bailout ban wouldn’t apply because Washington Mutual, and not J.P. Morgan, was the taxpayer. The bank has also noted the refund wouldn’t go to the bank directly, instead sitting in a pot at the FDIC that also houses the $1.9 billion J.P. Morgan paid for Washington Mutual’s banking assets and deposits.

That transaction is also in question as J.P. Morgan faces questions regarding the details of Washington Mutual’s failure at a Senate subcommittee meeting this week.

J.P. Morgan, now the second-largest U.S. bank in assets, unsuccessfully tried to buy Washington Mutual in early 2008. After months of back and forth negotiations between Washington Mutual and the FDIC, J.P. Morgan made a successful $1.88 billion bid for the thrift at an FDIC auction.

Federal regulators have disclosed few details surrounding the decision to let J.P. Morgan buy Washington Mutual at a bargain price.

In a statement, Sen. Carl Leven (D., Mich.) chairman of the Senate Permanent Subcommittee on Investigations said the testimony about Washington Mutual was needed to “construct a public record of the facts in order to deepen public understanding of what happened.”

J.P. Morgan reported a profit of 74 cents a share, up 85% from a year earlier and flat from the fourth quarter. Analysts polled by Thomson Reuters had forecast earnings of 64 cents on $26.46 billion in revenue.

Mr. Dimon wouldn’t give details about a $2.3 billion addition to litigation reserves, including reserves tied to mortgage-related matters.

“Obviously the mortgage area has been a very confusing, complex area,” and the reserve includes “everything related to mortgages, mortgage litigation” including mortgages J.P. Morgan got with the acquisition of Washington Mutual Inc. two years ago, he said.

Shares were up 3.3% to $47.38 in midday trading. The stock is up about 54% in the past 12 months.