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J.P. Morgan profit hurt by trading business

J.P. Morgan Chase & Co. said its first-quarter profit fell 6.7% as the largest U.S. bank by assets was hurt by tough conditions on Wall Street.

But shares rose 3.1% in premarket trading as the results weren't as weak as feared.

The New York bank reported a profit of $5.52 billion, or $1.35 a share. That compares with a profit of $5.91 billion, or $1.45 a share, in the same period of 2015. Analysts polled by Thomson Reuters had expected earnings of $1.26 a share.

Revenue fell 3.4% to $23.24 billion. On an adjusted basis, revenue declined to $24.08 billion, exceeding analysts' estimates of $23.4 billion.

The New York bank's profitability has suffered of late due to higher capital requirements. J.P. Morgan has responded by cutting costs and assets in an effort to reduce a regulatory burden that increases as a bank grows larger.

Return on equity, a measure of the J.P. Morgan's profitability, was 9% in the first quarter compared with 11% in the first quarter a year ago. 

J.P. Morgan's trading revenue decreased 11% to $5.17 billion from $5.81 billion in the first quarter of 2015. Corporate and investment bank head Daniel Pinto said in mid-February that trading was already down 20% in the quarter because of debt and equity capital markets activity.

Investment-banking fees fell 25% to $1.32 billion as double-digit declines in debt and equity underwriting revenue outweighed a small increase in deal-making fees.

Costs decreased 7% to $13.84 billion from $14.88 billion a year earlier, an effort the bank continues to drill down on.

J.P. Morgan set aside $1.82 billion in the first quarter to cover loans that could potentially turn bad in the future. That was significantly higher than the $959 million it reported in the first quarter of 2015 and the $1.25 billion it posted in the fourth quarter of 2015. The increase in reserves was primarily driven by downgrades to loans in the bank's oil, gas, metals and mining portfolios.

Profit at J.P. Morgan's corporate and investment bank was $1.98 billion, a 22% decrease from $2.54 billion in the same period last year. J.P. Morgan's commercial bank earned $496 million, a 17% decrease from the $598 million it earned in the year-ago quarter.

In the consumer bank, profit rose to $2.49 billion from $2.22 billion in the first quarter a year ago. The bank's asset management unit reported a profit of $587 million, up from $502 million in the first quarter of 2015.

J.P. Morgan extended $22.4 billion in mortgages in the quarter, a 9% decrease from the $24.7 billion the bank extended in the first quarter a year ago. Nevertheless, profit in its mortgage division, one of the largest in the U.S. by volume, was $526 million, up 61% from the $326 million it reported in the year-earlier period.

The bank recorded no material legal costs for the first quarter, compared with $687 million in the same period a year ago and $644 million in the fourth quarter. J.P. Morgan has paid out billions of dollars in settlements over the past several years. Mr. Dimon recently wrote in his annual shareholder letter that many legal and regulatory issues that J.P. Morgan and the banking industry have faced are beginning to dissipate, which will help boost the strength of the underlying businesses.

In prepared remarks, Mr. Dimon noted the challenging markets environment facing the industry but said the U.S. consumer remains healthy and consumer credit trends are favorable.

I think such giant banking institutions should not exist. Their main source of income is trading against their customers. They cannot be managed effectively and its better to broke them in smaller units. I would prefer to sell a rally.