Record earnings from JPMorgan Chase Co. (JPM) failed to improve its creditworthiness in the eyes of swaps traders, as reduced provisions for bad mortgages accounted for almost half of its profit.
Credit-default swaps on the second-biggest U.S. bank by assets, which investors use to hedge against losses or to speculate on creditworthiness, climbed 0.2 basis point to 71.7 basis points, according to CMA.
Profits rose 67 percent to $5.56 billion, the New York- based company said today in a statement. The results beat the average per-share estimate for adjusted earnings of $1.15 by 26 analysts surveyed by Bloomberg. Provisions for credit losses dropped 83 percent to $1.17 billion as defaults and late payments declined, allowing the bank to release money that had been reserved for bad loans.
“One of the reasons they did very well is they released a lot of reserves,” said Jason Brady, a managing director at Thornburg Investment Management Inc. in Santa Fe, New Mexico. The firm oversees $73 billion of assets, including stocks and bonds from both companies. “That doesn’t mean they’re making tons of money, it just means they’re not losing it,” Brady said.
Contracts protecting the debt of Bank of America Corp., the largest U.S. lender, climbed 0.5 basis point to 129.8 and those on Morgan Stanley increased 0.5 basis point to 137, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Swaps on Citigroup Inc. added 0.1 basis point to 119.4 and contracts on debt issued by Goldman Sachs Group Inc. gained 1.1 basis points to 111.3.
‘Fewer Risks’
JPMorgan, led by Chief Executive Officer Jamie Dimon, posted a record $17.4 billion in earnings last year, in part by releasing about $7 billion of reserves against bad loans back into income as the U.S. economy improved. Dimon, 55, has said he doesn’t consider reserve releases as “quality” earnings because they don’t represent growth in the bank’s businesses.
The bank may also settle an investigation by federal regulators into its foreclosure practices as early as today, executives said on a conference call.
The cost of protecting U.S. corporate bonds from default was little changed from the highest level this month after a report that U.S. retail sales increased in March.
Retail Sales
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.1 basis point to a mid-price of 95.1 basis points as of 5:04 p.m. in New York, according to index administrator Markit Group Ltd.
Sales at U.S. retailers rose in March for a ninth consecutive month, easing concern that the jump in food and fuel costs would cause consumers to retrench.
Purchases increased 0.4 percent following a 1.1 percent February gain that was larger than previously estimated, Commerce Department figures showed today in Washington.
The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, is at the highest level since March 31.
The price of Markit’s CDX North America High Yield Index, which falls as investor confidence deteriorates, declined 0.2 percentage point to 102.2 percent of face value.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
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