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Last Updated: Wednesday, 16 January 2008, 22:58 GMT
JP Morgan's $1.3bn sub-prime hit
JP Morgan Chase branch in New York City

US bank JP Morgan Chase has said its earnings for the last three months of 2007 fell 34% as a result of its exposure to soured US mortgage loans.

Net income was $2.97bn (1.5bn) in the quarter to the end of December, down from $4.53bn a year earlier.

The bank said it had to cut the value of investments linked to the US mortgage market by $1.3bn.

Other US and European banks, including Citigroup and Merrill Lynch, have also had to cut the value of their holdings.

Also on Wednesday, Wells Fargo said the home loans crisis had led to its first drop in quarterly profits since 2001.

Wells Fargo, the biggest bank on North America's West Coast, reported a 38% decline in net income to $1.36bn for its last three months of 2007.

However, the losses at JP Morgan and Wells Fargo were smaller than those of many of their peers.

On Tuesday, Citigroup reported a $9.83bn net loss for the last three months of 2007 after having to cut the value of its investments by $18.1bn.

Shares in JP Morgan rose 1.7% to $24.51, one of the few winners on Wall Street, while Citigroup fell 2.6% to trade at $26.24. Citigroup has lost more than half its market value since the beginning of 2007.

MAIN SUB-PRIME LOSSES SO FAR
Citigroup: $18bn
UBS: $13.5bn
Morgan Stanley $9.4bn
Merrill Lynch: $8bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
Freddie Mac: $2bn
JP Morgan Chase: $1.3bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $2.6bn
Paribas: $197m
Source: Company reports

Further problems

Denting earnings was the fact that JP Morgan cut the value of its investments linked to the US mortgage market by $1.3bn.

Chief executive Jamie Dimon said the bank had set aside $2.54bn in anticipation of further losses stemming from defaults on home loans and credit card repayments.

This was more than the $1.79bn it set aside in its previous quarter, and comes as consumers are having to deal with falling house prices, and higher energy and petrol costs.

JP Morgan's investment bank division was worst affected, with its profits slumping 88% to $124m. The company's credit card services arm was also hit, with profit down 15%.

Many of the problems facing banks today stem from a long period of low interest rates, which saw consumers borrow heavily and often beyond their means.

That was fine while interest rates stayed low, but as borrowing costs started to rise many consumers found it difficult to keep up with their loan and mortgage payments.

Default levels jumped to records, slashing the value of investments that had been linked to the mortgages and credit card debts, and plunging the global banking system into a credit crunch and lending crisis.



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