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JPMorgan (NYSE:JPM) reported better-than-expected results for the third quarter of the current year on October 12, 2012. As the table below demonstrates, the bank posted EPS of $1.4, against consensus estimates of $1.21, on revenues of $25.9 billion. Analysts were expecting the bank to generate $24.5 billion in revenues during the third quarter of the current year. While the top line exceeded its estimates by 6%, the bottom line surpassed its expectations by 16%. This is compared to a 4.6% positive revenue surprise and a 4.7% negative earnings surprise during the previous quarter. The bank was hit hard by a trading loss that swelled to around $6 billion when it reported the second quarter results.

Overall, the results were also better than prior period performances. The table below gives a complete comparison of the bank's third quarter performance with the linked quarter, and the same quarter of the previous year. The bank posted revenues of $25.9 billion, 13% above the revenues it generated in the linked quarter, and 6% above the revenues of the third quarter of the previous year. Net income surged 15% to $5.7 billion when compared to the linked quarter, and 34% when compared to the same period of the prior year. Record low interest rates drove the U.S. housing markets up, creating a boom in mortgages, helping the bank increase its mortgage originations.

The beat

Much of the improvement in the results was associated to favorable fixed income results, deposit and loan growth in the Consumer & Business Banking and Commercial Banking segments, higher mortgage originations and credit card sales volume, and positive net long-term product flows in Asset Management. The bank posted a record double digit increase in profits of the third quarter as compared to the quarter linked.

Segmental Performance Review

A majority of business segments saw positive momentum when compared to the performance of the third quarter of the previous year.

The Investment Bank segment was able post a bottom line of $1.6 billion, down 4% from a year ago and down18% from the quarter linked. Much of the deterioration in the results of the segment was blamed on lower net revenues and higher non-interest expenses. Net revenues from the segment remained 7% below the linked quarter's revenues, largely due to a $211 million loss from DVA on derivative liabilities. Excluding the impact of DVA, the bottom line for the segment surged 41%. Overall, investment banking fees were up 38%. Much of the improvement was associated with the 62% growth in debt underwriting, while revenues from equity underwriting surged 32%. Higher compensation expense at the segment drove non-interest expense up 3%.

Net income from the bank's Retail Financial Services surged 21% to $1.4 billion when compared YoY. However, it remained a significant 38% below the net income of the quarter linked. Non-interest revenues from the segment advanced 19% to $4.1 billion, driven largely by mortgage-related fees and income.

Earnings of $954 million from the Card Services and Auto segment remained 12% above when compared to the third quarter of the previous year. The surge was driven by lower provision for credit losses, combined with lower non-interest expense. Lower marketing expenses drove down the non-interest expense for the segment.

Income from Commercial Banking surged 21% YoY, largely on improvements in the top line and lower credit loss provisions. While higher investment banking revenues drove up the non-interest revenues, net interest income went up due to growth in loans and liability balances.

The bottom line of $420 million that Treasury & Securities Services posted remained 38% above when compared to the bottom line of the third quarter of the current year.

The Asset Management segment posted a $443 million figure for its bottom line, which was 15% above when compared to the same quarter of the previous year. The improvement was due to lower credit loss provisions, lower non-interest expense, and higher net revenues. Higher deposits and loan balances drove up the segment's net revenues, while expenses declined due to the absence of non-client related litigation expense.

Where we believe U.S. money-center banks with large exposure to the U.S. housing sector will benefit from the uptick in the said sector, they will also be negatively affected by the contraction in net interest spread or the spread that these banks earn over the cost of deposits. Prolonged record low interest rates have led this spread to contract. Effective expense management will also play a pivotal role in any improvement in the coming quarter's earnings for these banks.

Source: JPMorgan's Earnings Beat