JPMorgan Chase & Co., the biggest U.S. bank by assets, reported record third-quarter profit that beat analysts’ estimates as mortgage revenue soared 72%.

Net income rose 34% to $5.71 billion, or $1.40 a share, from $4.26 billion, or $1.02, a year earlier, the New York-based company said today in a statement. Earnings, which included a loss on accounting adjustments, beat the average estimate of $1.20 among 30 analysts surveyed by Bloomberg.

JPMorgan is still recovering from a wrong-way bet on credit derivatives that cost the bank about $6.25 billion through the first nine months of this year, not including what the bank said was a “modest” additional loss in the third quarter. Chief Executive Officer Jamie Dimon, 56, got help restoring investor confidence from historically low interest rates and government programs that fueled demand for home loans.

“The housing market has turned the corner,” Dimon said in the statement. “We were encouraged that credit trends continued to modestly improve, and, as a result, the firm reduced the related loan-loss reserves by $900 million.”

Low interest rates have also been hurting the industry as banks earn less on the money they lend. The bank’s net interest margin, which measures profitability on loans and other interest-bearing assets, dropped to 2.43% from 2.66% a year earlier.

Share Performance

“Investors are using that as an excuse to take profits,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets Corp.

JPMorgan fell 0.5 % to $41.62 as of 4:15 p.m. in New York. The stock was up 27% this year before today, while the KBW Index of the largest banks rose 30 %.

Wells Fargo & Co., the largest mortgage lender, fell 2.6% after reporting that its net interest margin narrowed as well.

JPMorgan’s revenue climbed 6% to $25.9 billion from $24.4 billion during the third quarter of last year. At the investment-banking unit, it fell 1% to $6.28 billion from $6.37 billion.

Trading revenue, which includes fixed-income and equity- markets, was virtually unchanged at $4.76 billion, the company said. The investment bank’s credit portfolio, which contains the remaining credit derivatives position that generated the loss in the chief investment office in London, generated $90 million in revenue from $578 million in the third quarter of last year.

Fixed Income

Fixed-income trading, excluding accounting adjustments, jumped 33% to $3.73 billion from a year earlier while equity trading was little changed at $1.04 billion.

Industrywide third-quarter equities-trading revenue probably fell 14% from the same period in 2011, according to estimates by Kian Abouhossein, a JPMorgan analyst.

Trading and the investment bank’s credit portfolio declined by $211 million because of a so-called debt-valuation adjustment in the third quarter as the price of the bank’s debt rose.

Retail banking, which includes home loans and checking accounts, earned $1.41 billion, up 21% from $1.16 billion a year earlier.

JPMorgan benefited from gains in mortgage lending as low interest rates and federal incentive programs encouraged homeowners to refinance. Dimon said on a call with analysts that refinancings accounted for about 75% of mortgage volume during the quarter.

Mortgage Fees

Mortgage fees and related revenue totaled $2.38 billion, compared with $1.38 billion a year earlier. Demand for loans also rose as the unemployment rate fell to 7.8 % in September from 9.0 % a year ago.

Fewer consumers fell behind on their credit-card payments in the third quarter compared with the same period in 2011. Loans at least 30 days overdue, a signal of future write-offs, fell to 2.15% from 2.9% in 2011. Write-offs dropped to 3.57% from 4.7% the prior year and 4.35% in the previous quarter.

Industrywide, U.S. credit-card delinquencies were 2.32% in August, down from 3.04% a year earlier, according to Moody’s Investors Service.

Residential mortgage volume in the U.S. rose about 33% to $412 billion in the third quarter from a year earlier, according to estimates by the Mortgage Bankers Association.

Bankruptcy Requirement

The Office of the Comptroller of the Currency forced the industry to write down mortgages to borrowers who have filed for bankruptcy protection, which cost JPMorgan a one-time charge of $825 million in the third quarter, Chief Financial Officer Douglas Braunstein told reporters on a conference call.

JPMorgan wrote down about $2.8 billion in loans, most of which were home-equity loans, to the value of their underlying collateral, Braunstein said.

“We would expect, given the characteristics of the loans we were asked to charge off, that we will receive that value back in the form of principal payments over time,” he said.

The change forced San Francisco-based Wells Fargo to increase net loan charge-offs by $567 million in the third quarter, the bank said.

JPMorgan set aside $684 million more toward its litigation costs during the third quarter mostly for mortgage-related lawsuits. Dimon previously told shareholders that the company would be making as much as $24 billion in annual profit if it weren’t for all of its mortgage losses.

Market Capitalization

JPMorgan has regained more than $41 billion of the $51 billion in market value it lost after Bloomberg News first reported on April 5 that the company had amassed an illiquid book of credit derivatives at its chief investment office in London. Dimon initially dismissed the news as a “tempest in a teapot” when the bank reported first-quarter earnings.

During the third quarter, JPMorgan’s CIO had a $449 million loss as it closed out the division’s $12 billion credit derivative position. The loss JPMorgan described as “modest” was on holdings moved to the investment bank, the size of which the company won’t disclose.

The bank also changed a key risk model executives previously said may have helped fuel the loss in the London unit of the CIO, at least the third such model it’s used this year.

The new analysis cut the firm’s calculation of overall value-at-risk, or VaR, by $36 million, or 24%, to $115 million in the third quarter, the New York-based bank said today on its website. The model cut VaR by $26 million within the fixed-income category, which still more than doubled from a year earlier as the bulk of the money-losing position was transferred into the investment bank.

VaR Changes

“VaR models change almost every time we talk,” Dimon said today in a call with journalists. “When we moved it to the investment bank, they adopted, particularly for the synthetic credit portfolio -- and there are some other changes too -- the investment bank’s model, which we think was the best one.”

The botched bets spawned management changes and dismissals, beginning with Chief Investment Officer Ina Drew, 56, who retired four days after the loss was disclosed on May 10.

Two senior managers announced plans to depart last week. Irene Tse, who ran the CIO for North America under Drew, told employees she’s leaving to start a hedge fund. Former Chief Risk Officer Barry Zubrow, who now runs JPMorgan’s lobbying operation, said Oct. 5 that he will retire at year-end.

Braunstein, 51, may also leave his position and join the firm’s investment bank, where he previously led dealmaking, according to a person with direct knowledge of the matter.

JPMorgan’s net exposure to so-called peripheral European nations jumped to $11.7 billion as of Sept. 30 from $6.2 billion three months earlier as the firm reduced short positions in the CIO’s synthetic credit portfolio. Dimon, who has said the bank won’t abandon its commitments in countries such as Italy and Spain, said the higher level is closer to normal.

“You should expect to see that exposure go up a little bit from here too,” he told reporters.

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