People pass a sign for JPMorgan Chase & Co. at it's headquarters in Manhattan on October 2, 2012 in New York City.
People pass a sign for JPMorgan Chase & Co. at it's headquarters in Manhattan on October 2, 2012 in New York City. - 
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JPMorgan Chase, one of the bellwethers of the global financial system, has reported a record profit for the third quarter. The huge diversified bank headed by Jamie Dimon—the largest in the U.S. by assets—says it earned $1.40 per share, up 34 percent from the July-September period in 2011. Analysts polled by FactSet had predicted earnings of just $1.21 per share.

And money coming in the door—that’s revenue—was up six percent, also outpacing forecasts.

As the economy improves, JPMorgan is setting aside less money in loan-loss reserves, helping the bottom line. The bank had $1.8 billion on the books for potential loan losses in Q3 2012, down 26 percent from the $2.4 billion in loan-loss reserves one year ago.

Earnings also rose at Wells Fargo, and the upcoming wave of bank earnings -- Citigroup, Bank of America, and Goldman Sachs -- will be closely parsed to get hints of where the economy and stock market might be headed.

Overall, analysts are expecting pretty good performance this quarter. Though beating last year’s numbers is an easy mark to hit, because in mid-2011 financial companies faced severe headwinds, including the U.S. credit-rating downgrade and an even more dire phase in the European debt crisis.

Now, banks are doing a bumper business in mortgages, driven by low interest rates, says Christopher Whalen at Tangent Capital Partners. Whalen says this especially benefits domestically focused banks with large retail operations, like Wells Fargo and U.S. Bank.

“They're writing a lot of new mortgages, mostly refinancings of existing mortgages,” says Whalen, “and this is almost all guaranteed by Uncle Sam, so these banks aren't taking any risk, and they're earning big fees.” Whalen says the FHA (Federal Housing Administration) backs most home loans in the U.S.

JPMorgan (which purchased the crippled Wall Street investment bank Bear Stearns during the financial crisis) and Wells Fargo, have recently been hit with lawsuits over bad mortgages -- written and repackaged in the housing bubble. More such lawsuits may be on the way. Moshe Orenbuch, managing director at Credit Suisse, says the big banks can handle the legal heat for now.

“There are no legal troubles that are good news for any of the banks,” says Orenbuch. “The important point is that the financial ramifications of them are manageable within the kinds of reserves and earnings power that both banks have.”

However, Chris Low, cheif economist of FTN Financial, says public perception of the banks has taken a hit, "Gallup apparently says that the approval rating on banks in slightly lower than Richard Nixon's approval rating was during Watergate, just to put it into perspective."

Overall, U.S. banks are expected to do better than other major corporate sectors during this earnings season. S&P Capital IQ predicts profit growth of 9.4 percent across financial companies reporting third-quarter earnings. The entire S&P 500 is predicted to suffer a decline in earnings of 1.3 percent.

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