J.P. Morgan Chase & Co. today reported second-quarter net income of US$2 billion, less than half of the US$4.2 billion it earned in the second quarter of 2007, but still beating Wall Street expectations.

Current-quarter results include the effect of merger-related items amounting to a net loss of US$540 million (after-tax) related to the acquisition of The Bear Stearns Companies Inc., which closed on May 30. Excluding these items, net income would have been US$2.5 billion.

Net income in the investment bank was US$394 million, down from US$1.2 billion in the prior year. The lower results reflected increased noninterest expense, a decline in net revenue and a higher provision for credit losses, partially offset by the benefit of reduced deferred tax liabilities.

“Our earnings were down significantly due to the unfavorable credit environment and market conditions. The Investment Bank took additional markdowns on leveraged loans and mortgage-related positions. Retail Financial Services experienced further deterioration in its home lending portfolio, which resulted in higher charge-offs and an increase in the allowance for credit losses,” said Jamie Dimon, chairman and CEO.

“However, the firm overall continued to maintain solid underlying business momentum. We had market share gains in Investment Banking fees and key product areas. Retail Financial Services posted organic revenue growth of 15%, and all of our major businesses produced growth in accounts, balances and volumes. Further positive results in the quarter included record performance from both Commercial Banking and Treasury & Securities Services,” Dimon added.

For the quarter, retail financial services profit was down 23% to US$606 million. The regional banking division saw net income of US$354 million, down 44% from the prior year. Income in the mortgage banking area was US$169 million, an increase of US$98 million, or 138% from the prior year. Auto finance net income was US$83 million, down 2% from the prior year. Profit in the card services group was US$250 million, a decline 67%. Commerical banking recorded net income of US$355 million, an increase of US$71 million, or 25%, from the prior year driven by record net revenue and lower noninterest expense.

Treasury and securities services had net income of US$425 million, an increase of 21%, driven by record net revenue, partially offset by higher noninterest expense. Asset management saw net income of US$395 million, down 20% due to lower performance fees and higher expense offset partially by increased net revenue from growth in deposit and loan balances. The corporate/private equity division had a loss of US$422 million, compared with net income of US$382 million in the prior year.

Dimon said that the firm has made progress towards full integration of Bear Stearns, while also significantly reducing combined risk positions. “We now have an expanded platform to better serve our institutional clients – one which we fully expect will make our franchise stronger over time,” he added.

“I am pleased with the strength of our balance sheet and capital positions, particularly in the context of the market challenges we have faced during the past year. During the quarter, we added US$1.3 billion to our allowance for credit losses (which now totals US$13.9 billion) and maintained strong capital ratios,” Dimon said.

Discussing the firm’s outlook, Dimon said, “Our expectation is for the economic environment to continue to be weak — and to likely get weaker – and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer. However, the firm has delivered underlying growth across most of our businesses, and with our substantial capital base we can continue to invest for the future. In spite of the environment, we are confident that we are building an increasingly strong and profitable company.”