JP Morgan Chase’s Big Profits Don’t Mean Much

JP Morgan Chase reported a net income of $3.3 billion in Q1 2010. Their profits, which are up 57% from Q1 2009, came largely from trading. The JP Morgan report comes the same week the Dow went above 11000 for the first time in 18 months.

Traders are happy. JP Morgan CEO Jamie Dimon stated he is optimistic about the economy. But where’s the context for the rest of us?

For big banks, making profits off investments means borrowing money at a record-low interest rate, then reinvesting it into bonds, commodities, currencies, and other securities with higher yields, according to AP reporter Stevenson Jacobs. That could all go down the toilet if interest rates rise. Although loan losses are slowing down, banks still aren’t making nearly as much off consumers as they are from their investment spread. The AP has more:

And although the big banks starting with JPMorgan Chase & Co. on Wednesday are expected to have good news, analysts say their continuing rebound is unlikely to boost lending. Banks are still conservative about loans, while consumers and business remain wary about adding to their debt burdens. Losses on residential real estate have slowed, but a wave of commercial real estate defaults is hammering small and midsize banks. Analysts forecast that trend will continue through 2010 and beyond.

That’s forcing even big money-making banks to set aside billions of dollars, money that will protect against losses but that will also eat into profits. Wells Fargo, Bank of America, JPMorgan Chase and Citigroup may have to allocate a combined $33.2 billion over the next two years just to cover home equity losses, according to CreditSights Inc.

“Things aren’t as bad as they were six months ago, but that doesn’t mean everything is rosy,” said Paul Miller, a managing director for FBR Capital Markets. “We still think normalized (bank) earnings are still two years off at best.”

Along that line, analysts don’t see lending picking until unemployment falls from its current level of 9.7 percent and small and midsize businesses start expanding.

That last point on small and midsized businesses expanding doesn’t look good yet. SMB owners still aren’t optimistic, according to the Wall Street Journal. Jobs don’t look rosy, either. The people most excited about the so-called economic recovery seem to be economists, the media, and, naturally, the heads of big banks.

The verdict? Chase made money, thanks to low interest rates. The Dow is up. But jobs, small businesses, and government policy are still shaky. I’ll believe in a recovery when I see it.

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