JPMorgan Chase & Co. said Thursday it expects to realize about $2 billion in savings related to its acquisition of Washington Mutual Inc., the failed Seattle thrift the bank acquired at the end of September.
The majority of the savings will be realized by the end of this year, according to slides on the company’s Web site from an investor day presentation. This includes about $1.35 billion related to job cuts, the bank said. JPMorgan said about 12,000 jobs will be eliminated related to the acquisition. In December, the bank said it would cut a total of 9,200 jobs related to the WaMu deal. The 12,000 figure includes 2,800 jobs expected to be lost through attrition. At the end of December, the bank had a total of 224,000 employees worldwide.
Shares jumped $1.83, or 8.4 percent, to $23.56 in afternoon trading amid a rise in the banking sector as a whole.
JPMorgan’s purchase of Washington Mutual, the largest bank ever to fail in U.S. history, added massively to the bank’s consumer banking business and helped the company book a $1.1 billion gain in the fourth quarter.
However, analysts and investors have been worried that corroding loans, particularly soured mortgages, inherited from WaMu could mar JPMorgan’s results going forward.
Assuming a 36 percent peak-to-trough decline in home prices, the bank expects remaining lifetime losses on WaMu’s home lending portfolio to be $32 billion to $38 billion. The more home prices fall, the less banks will be able to reclaim on defaulted loans. The bank said it has not yet experienced losses beyond initial expectations. However, if delinquencies and losses did increase more than expected, the bank would need to add to loan loss reserves.
The bank sees $1 billion to $1.4 billion in quarterly losses from noncredit impaired home equity loans this year. Home equity losses are expected to level off in 2010, but will likely remain high, JPMorgan said.
Meanwhile, quarterly losses among subprime mortgage loans could be as high as $375 million to $475 million over the next several quarters, JPMorgan said.
Retail Financial Services Chief Executive Charlie Scharf said there are early signs of stabilization in the troubled California housing market. Discounts on the appraised value of properties have declined compared with year-ago figures, and sales are being completed at a faster rate. Florida, however, has yet to exhibit any positive trends. Losses in the New York market are also expected to rise.
In its credit card segment, JPMorgan expects losses from the WaMu portfolio to approach 15 percent in the first quarter. The bank expects its total credit card loss rate to edge up to 7 percent.
Among its commercial business, JPMorgan said its construction and development portfolio is the greatest area of concern, with losses expected to rise through 2010.
The bank also anticipates waning demand for commercial loans as businesses borrow less for expansion projects amid the worsening economy.
On a positive note, JPMorgan said it has been able to stabilize WaMu deposits. Since taking over operations on Sept. 25 through Feb. 13, WaMu deposits have increased by $500 million. This follows the withdrawal of $15 billion in deposits during the two weeks in September after the bankruptcy filing of Lehman Brothers Holdings Inc., which led to the bank’s failure.
Earlier this week, JPMorgan announced plans to slash its quarterly dividend to 5 cents per share from 38 cents in an effort to preserve capital.
Chief Executive Jamie Dimon said the cut was a precautionary move to ensure that the company has financial flexibility should economic conditions worsen. The move will save the company about $5 billion per year.
Dimon said he is not predicting, but is ready for: A recession lasting two years, a U.S. unemployment rate above 10 percent, and a 40 percent peak-to-trough decline in home prices.
Dimon expects the bank to be profitable throughout 2009, and said the bank is on track to report first-quarter earnings roughly in line with analyst expectations.
Analysts surveyed by Thomson Reuters, on average, forecast earnings of 33 cents per share for the first quarter.
JPMorgan has yet to post a quarterly loss during the financial meltdown that began in 2007, when mortgage defaults started spiking. The bank in January reported a modest fourth-quarter profit of $702 million — thanks mostly to its purchase of Washington Mutual.
JPMorgan on Monday said it expects first-quarter markdowns of about $2 billion in its investment bank — less than the $2.9 billion marked down in the fourth quarter. The New York-based bank also anticipates write-downs of approximately $400 million in its private equity business.
JPMorgan, like San Francisco-based rival Wells Fargo & Co., has received $25 billion in government aid. Weaker competitors Citigroup Inc. and Bank of America Corp. have each gotten $45 billion in government support.
