J.P. Morgan Chase & Co. today reported third quarter net income of US$527 million, compared with net income of US$3.4 billion in the third quarter of 2007.

Current-quarter results include a charge of US$1.2 billion (after-tax) to conform loan loss reserves and an extraordinary gain of US$581 million (after-tax), related to the acquisition of Washington Mutual’s banking operations, which closed on September 25.

Investment banking net income was US$882 million, an increase of US$586 million from the prior year. The improved results reflected an increase in net revenue and the benefit of reduced deferred tax liabilities offset largely by increased noninterest expense, the firm reported.

Net revenue was US$4.0 billion, an increase of US$1.1 billion, or 37%, from the prior year. Investment banking fees were US$1.6 billion, up 20% from the prior year. Advisory fees were US$576 million, down 3% from the prior year, reflecting decreased levels of activity. Debt underwriting fees were US$499 million, up 7%. Equity underwriting fees were US$518 million, up 94% from the prior year. Fixed Income Markets revenue was US$815 million, up 19% from the prior year. The increase was driven by record results in rates and currencies, and strong performance in credit trading, emerging markets, and commodities, as well as gains of US$343 million from the widening of the firm’s credit spread on certain structured liabilities.

Largely offsetting these results were mortgage-related net markdowns of US$2.6 billion, as well as US$1 billion of net markdowns on leveraged lending funded and unfunded commitments.

Retail financial services saw net income of US$247 million, a decrease of US$392 million, or 61%, reflecting a significant increase in the provision for credit losses in regional banking and higher noninterest expense in mortgage banking. These factors were offset partially by revenue growth in all businesses.

“Our third quarter financial results declined sharply, driven by markdowns on mortgage trading positions and leveraged loans, and higher credit costs due to continued deterioration in our home-lending portfolio,” said Jamie Dimon, chairman and CEO, in a release. “In this environment, we have kept our focus on meeting our clients’ needs and deploying capital wisely. We continue to see numerous examples of organic growth, including in investment banking market share, new checking accounts, net flows in asset management and increased loan and liability balances in commercial banking and treasury & securities services.”

Dimon added that he was pleased to be able to purchase Washington Mutual’s banking operations. “We expect the Washington Mutual transaction to create long-term value for shareholders while also being immediately accretive, adding 50 cents per share to earnings in 2009. In light of the unprecedented challenges and risks facing the housing market, we have incorporated expectations of significant credit losses from Washington Mutual’s home-lending portfolio into the structure of the transaction. We also raised US$11.5 billion of common equity to support the transaction and add to our already substantial capital base,” he said.

“Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expect reduced earnings for our firm over the next few quarters. However, with a total loan loss allowance of US$19 billion (including Washington Mutual) and an 8.9% Tier 1 capital ratio, we feel well-positioned to handle the turbulent environment and, most importantly, to continue to invest in our businesses and serve our clients well,” Dimon added.

IE