The Automated Teller Machine Business Club

By David Henry

NEW YORK |
Thu Jul 14, 2011 12:34am EDT

NEW YORK (Reuters) – When JPMorgan Chase Co reports second-quarter results on Thursday, Wall Street will care more about its forecasts than its earnings, looking for clues on the direction of the U.S. lending business.

Credit quality likely improved during the quarter for products like credit cards, and the overall banking system saw a slight increase in loan volume, which could bode well for the biggest banks’ loan growth. JPMorgan is the first of the major lenders to post results.

Wall Street expects JPMorgan to report second-quarter earnings of $1.21 a share, up from $1.09 a year earlier, based on the average estimate of 28 analysts surveyed by Thomson Reuters I/B/E/S as of Wednesday afternoon.

All of the gain, if it comes through, would be attributable to the fact that this quarter, JPMorgan did not have to pay a one-time tax in the United Kingdom on investment banker bonuses that last year cost it 14 cents a share in profits.

But with the U.S. economy still sluggish, trading volumes weak at many banks, and regulatory reform reshaping the industry, investors care much more about the next few quarters than the three months ended June 30, analysts said.

“You have to look under the hood to figure out whether these big survivors of the financial crisis can really make decent returns for shareholders,” said Frederick Cannon, research chief at Keefe, Bruyette Woods, a New York-based investment firm that specializes in banking.

With many consumers still cutting back on borrowing, and businesses holding lots of cash, the U.S. gross domestic product is growing faster than bank lending — a reversal of more than five decades of banking speeding ahead of the economy, said Cannon.

“It is that structural shift in the whole business of lending that has made investors really try to get a handle on what banks can earn,” said Cannon.

That shift makes life tough for Chief Executive Jamie Dimon. JPMorgan reported three months ago that its loan book at the end of March was down 4 percent from a year earlier as shrinkage of its consumer loan portfolio overwhelmed improvement in business lending.

As the loans have been running down, so have JPMorgan’s lending profits, even before its expense provisions for bad loans. Pre-provision profits in the March quarter were down 20 percent from a year earlier.

The results are expected to lag first-quarter earnings of $1.28 a share, which benefited from strong trading volumes in JPMorgan’s capital markets operations — part of one of the biggest investment banking businesses on Wall Street.

Analysts say they will be watching trading revenue in Thursday’s report for clues to the severity of the slowdown in investment banking results in reports in coming days from Goldman Sachs, Morgan Stanley and Citigroup.

“Most people have kind of written off the second quarter to slow U.S. economic growth,” said Peter Kovalski, a money manager at Alpine Woods Capital, which owns JPMorgan and other bank stocks in its $6 billion portfolio.

“What is more important is the outlook that is talked about for the third quarter and the second half of the year,” Kovalski said.

CEO Dimon said in an investor conference June 2 that he was encouraged by an increase in demand for loans from mid-sized companies. JPM’s average balance of middle market loans in its commercial banking division was up 13 percent in the first quarter from a year earlier. Those loans amounted to 6 percent of all JPMorgan’s outstanding loans and less than 2 percent of its $2.2 trillion of assets.

JPMorgan shares closed Wednesday at $39.62, up 23 cents. Since the start of the year, the shares were down nearly 7 percent.

(Reporting by David Henry; Editing by Gary Hill)