By Anirban Sen and David Henry

(Reuters) – JPMorgan Chase & Co reported a better-than-expected quarterly profit on Friday as it released some of the cash it had built up against coronavirus-driven loan losses, although the bank cautioned that demand for loans was likely to remain sluggish this year.

For most of last year, Main Street lenders were grappling with the economic fallout of the pandemic, setting aside tens of billions of dollars to cover potential loan defaults by struggling businesses and households.

But speedy vaccine deployments and nearly $2 trillion in stimulus have raised hopes of a recovery from one of the worst downturn in decades, prompting banks to start unwinding some of their massive loan loss reserves.

“You will have a better economy in the second half [of the year] because we have the vaccine coming, we have fiscal stimulus and people have saved up a lot of money,” JPMorgan Chief Executive Jamie Dimon said.

“There will be a lot of pent-up demand and, hopefully, optimism because of the fact that we are getting through this mess. By sometime this summer you could have a very healthy economy.”

JPMorgan CFO Jennifer Piepszak said the bank had the ability to repurchase up to $4.5 billion of stock in the first quarter, according to regulatory income-based limits on capital reductions.

The pandemic has also caused a plunge in short and long-term interest rates that hurt interest income, but the Wall Street arms of the biggest banks have benefited from volatility in global financial markets, a rush for stock market listings and emergency corporate fundraising.

JPMorgan’s net income rose 42% to $12.1 billion, or $3.79 per share, in the quarter ended Dec. 31. Revenue rose 3% to $30.2 billion. During the quarter, it released credit reserves of $2.9 billion, adding 72 cents to its earnings per share.

Excluding the reserves, the bank reported net income of $9.9 billion, or $3.07 per share, which was well ahead of the average Wall Street estimate of $2.62 per share, according to Refinitiv.

About 70% of JPMorgan’s beat came from reserve releases and much of the benefit was already priced into its stock, Evercore ISI analyst Glenn Schorr estimated.

Analysts called the results solid, considering low interest rates and business challenges during the pandemic. “These were strong results and the economic outlook is improving,” Schorr wrote in a note to clients.

In the latest quarter, JPMorgan’s numbers also received a boost from continued strength in its trading and investment banking units.

Investment banking revenue surged 37% to $2.5 billion, driven by higher advisory fees across all its products. Trading revenue rose 20% to $5.9 billion.

Looking forward, JPMorgan said in a slide presentation to analysts that it expects its non-interest expenses to go up in 2021 to about $68 billion from $65.5 billion, as it makes another $1.5 billion of investments in its business and spends another $900 million on its technology.

The spending plan continues JPMorgan’s practice of using its financial heft as the biggest U.S. bank to expand its business and take market share from other lenders as it fights to hold off non-bank competitors.

NOTE OF CAUTION

Still, JPMorgan chief Dimon warned of “significant near-term uncertainty” and said the reserve takedown did not represent “core or recurring profits”, while other top executives warned that comparisons with 2020 will be “challenging,” due to a record performance from markets during the year.

Shares of JPMorgan, Citigroup Inc and Wells Fargo & Co, which had seen a strong rally in the run-up to earnings, were all down in early trading even as they reported better-than-expected profits.

Near-zero Federal Reserve interest rates led to a record reduction in net interest margins in 2020 – the difference between what banks charge for loans and what they pay out to depositors.

JPMorgan’s net interest income fell 7% to $13.4 billion.

Interest metrics are closely watched by investors to show how much central-bank policies are affecting income, and how well banks are managing their balance sheets.

The bank’s other reporting lines held up well during the quarter. Three of JPMorgan’s four operating units reported higher revenue, with the consumer & community banking unit recording an 8% decline.

Trading revenue surged as the bank benefited from volatility in financial markets with investors reassessing their portfolios at the end of the year.

(Reporting by Anirban Sen in Bengaluru and David Henry in New York; Editing by Saumyadeb Chakrabarty)

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