NEW YORK (Reuters) - JPMorgan Chase & Co said yesterday quarterly profit fell a worse-than-expected 24 percent as the No. 3 US bank lost $1.3 billion on risky mortgages and set aside more money for rising losses on home-equity loans.

Investors, however, rewarded JPMorgan for turning a profit while some US banks post huge losses from bad bets on sub-prime mortgage-related securities. JPMorgan shares were up seven percent in afternoon trade.

JPMorgan chief executive Jamie Dimon was bearish about consumer credit quality, but he said rough financial markets made it more likely the bank would make an acquisition.

Still, JPMorgan has significant exposure to cash-strapped US consumers who face higher energy and food costs while they watch the value of their homes slide.

"Though the numbers were slightly weak, you have to give Jamie Dimon credit for avoiding most of the problems that have plagued his competitors," said Thomas Russo, a partner at Gardner Russo & Gardner, where he helps invest more than $3 billion.

JPMorgan reported fourth-quarter income from continuing operations of $2.97 billion, or 86 cents a share, down from $3.91 billion, or $1.09 a share, in the year-earlier quarter.

Analysts, on average, had looked for JPMorgan to earn 91 cents a share, according to Reuters Estimates.

JPMorgan's market capitalisation of about $137 billion is now larger than Citigroup Inc's $130 billion. Citigroup, which has more assets, lost $9.83 billion in the fourth quarter, compared to JPMorgan's profit of nearly $3 billion. On the other hand, Dimon and his team have underestimated the losses on the bank's $95 billion portfolio of home equity loans.

Late last year, Dimon said home equity losses would be $250 million to $270 million per quarter over the next several quarters. On Wednesday during a conference call, the company said the losses could be $100 million more per quarter than its earlier forecast.

Home-equity losses also contributed to the 38 percent decline in fourth-quarter profit at Wells Fargo & Co , the first decline in more than six years. JPMorgan, Wells Fargo and other US banks have been burned by lax underwriting, reliance on independent brokers to find them customers and faulty real estate appraisals. The higher defaults include borrowers considered to have better credit than risky sub-prime customers.

Merrill Lynch analyst Guy Moszkowski said in a research note JPMorgan's credit quality is as bad as Citigroup's.

"And you could argue (JPMorgan) doesn't reserve enough" for losses, he said.