JPMorgan Chase & Co posted better-than-expected quarterly earnings on Thursday as it wrote off fewer bad loans, but its shares dropped as investors fretted about management's sober assessment of the economy.

The first of the major banks to report, JPMorgan's results suggested that while the recent pain of steep loan losses is easing, there is little for bank investors to look forward to as uncertainty over capital standards and financial regulation hangs over the sector.

Much of JPMorgan's gains in the quarter came from areas that cannot be a stable source of income in the future, such as reducing the amount of money set aside to cover bad loans. And in some areas, including prime mortgages, more loans stopped performing, boding poorly for Citigroup Inc and Bank of America Corp , which report earnings on Friday. Citi and Bank of America shares fell 3 percent and 3.5 percent, respectively.

JPMorgan's trading revenue was weaker than last year but better than expected, which might be a positive sign for rivals Goldman Sachs and Morgan Stanley , which report next week.

The results are just OK -- there's a little less than meets the eye here, said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass said he is trading out of JPMorgan after the results.

The bank's loan book continued to shrink, signaling that it is hesitant to take new credit risk now. It also said it cannot estimate how financial reform legislation will affect its results.

And although Chief Executive Jamie Dimon said in the first quarter that the U.S. economic recovery could be solid, he sounded more measured on Thursday.

It is too early to say how much improvement we will see from here in the bank's consumer lending businesses, Dimon said in a statement, adding that returns there are still unacceptable.

Later, Dimon told analysts on a conference call, We don't know what's going to happen to home prices, and we don't think anyone knows.

JPMorgan shares fell 2 percent in midday trading to $39.48, while the KBW Banks Index <.BKX> dropped 2.5 percent.

The bank's second-quarter earnings jumped to $4.8 billion, or $1.09 a share, from $2.7 billion, or 28 cents a share, in the year-earlier period.

Excluding a benefit from lower loss reserves, earnings beat analysts' average forecast of 67 cents a share, according to Thomson Reuters I/B/E/S.


Investment banking net income fell 6 percent to $1.38 billion, as markets were roiled by the European sovereign debt crisis, the BP oil spill, and the U.S. equity flash crash.

It's been a tough environment to trade, and we're still concerned about the investment banks, said Tim Ghriskey, chief investment officer at Solaris Asset Management, which oversees about $2 billion.

Revenue from fixed income, commodities and currency trading was down 28 percent to $3.56 billion. Fixed income trading has been a key source of profits for all the major banks since early 2009. At JPMorgan, trading revenue, boosted by its acquisition of troubled investment bank Bear Stearns Cos in March 2008, supported the company as consumer loans soured last year.

This quarter, JPMorgan wrote off fewer of those loans as uncollectable, allowing it to reduce the money set aside to cover losses, or reserves, by $1.5 billion. That was a key source of profit in the quarter, amounting to 36 cents a share.

The bank wrote off 3.28 percent of the loans in its portfolio on an annualized basis, down from 4 percent a year earlier, adjusting for an accounting change.

Some analysts questioned whether the bank was too aggressive with its reserve reduction, given worries that swirled in the quarter about the possibility the U.S. economy may be headed for a double dip recession.

We are extremely cautious and careful on taking down reserves, Dimon said.

Losses on consumer credit, such as mortgages, credit cards and other loans, dipped in the second quarter compared with both the first quarter and the 2009 second quarter. But bad loans increased in some areas, most notably prime mortgages.

Commercial loans showed signs of a pickup in demand, the bank said, and other businesses, including wealth management, flourished in the quarter.


Dimon said the bank views itself as capital heavy, and JPMorgan bought back about $500 million of its shares in the first half of the year.

Many banks are eager to boost their dividends, but regulators are reluctant to allow it, making share buybacks more likely.

Dimon repeated that JPMorgan will raise its dividend when it is certain that unemployment and loan losses are stabilizing. He told analysts that uncertainty over bank capital requirements is also preventing the bank from raising the payout. International regulators are expected to determine rules on bank capital before the end of the year.

The cost of U.S. bank reforms is also uncertain, Dimon said. Congress on Thursday was set to vote on the broadest overhaul of U.S. financial rules since the Great Depression, paving the way for President Barack Obama to sign the measure into law.

As the largest U.S. derivatives dealer, JPMorgan could have the most to lose from the bill before Congress. The bill aims to curb lucrative over-the-counter derivatives trading. It will also force banks to end trading for their own profits. JPMorgan had $76.46 trillion in notional derivatives exposures at the end of the first quarter, according to the most recent report from the Office of the Comptroller of the Currency.

Separately, JPMorgan posted a second-quarter charge of $550 million from a payroll tax related to bonuses paid to British employees. Citi has said the tax will cost it $400 million in the quarter, Bank of America has said its cost will be $465 million, and Goldman has said it will pay more than $600 million.

(Reporting by Elinor Comlay; additional reporting Dan Wilchins and Jennifer Ablan; editing by John Wallace)