Earnings Reports

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JPMorgan Chase, America's largest bank by assets reported better than expected second quarter earnings Tuesday before the open. Revenue of $30.5 billion beat expected $29.75 billion. $JPM’s fixed income and equities markets revenue fell from red hot first quarter. Investment banking had a record quarter. Goldman Sachs also reported. Bank of America, Citigroup, PNC and Wells Fargo report Wednesday.

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 JPMorgan Chase & Co NYSE: JPM · Reported Earnings Before Open Tuesday

 $3.78 Beat $3.18 EPS Forecast AND $30.5 Beat $29.75 Billion Forecast in Revenue

Earnings

JPM posted second-quarter profit of $11.9 billion, up from $4.7 billion a year earlier. Its earnings per share of $3.78 and revenue of $30.5 billion exceeded analysts’ expectations of $3.18 EPS and $19.75 in Revenue.

In the current ultra-low interest rate environment JPMorgan has relied more on revenue from trading. JPM's total trading revenue for the second quarter was $6.8 billion, down 30% from the year-ago quarter. Bond trading revenue fell as much as 44% YOY, the first decline since the first quarter of FY 2019. The bank's equities trading revenue was up 13% YOY, significantly better than the decline analysts were expecting but still a marked deceleration from the past five quarters.

JPMorgan Chase $JPM, America's largest bank kicked off the banking sector's Q2 21 earnings season on Tuesday before the market opens with expectations for strong earnings. The Federal Reserve earlier in the year allowed the resumption of buybacks and dividends. Expectations are high that the economic reopening of the US economy could release more cash from reserves in the form of extra dividends.

JPMorgan's near-term outlook focus is on the cadence of expected credit losses and whether the additional stimulus will reduce (or just delay) cumulative credit losses, capital management, M&A and share buybacks at JPM’s current valuation.  The bank rally has been fueled by expectations for the economy reopening and infrastructure spending.  The new surge in home prices has also buoyed optimism for the mortgage business and banks profits thereto.

  

JPMorgan Chase & Co NYSE: JPM

Market Reaction:

Weekly Close 151.91 ▼ 7.18 (- 4.51%) from High $159.09 Mon, Jul 12 1:00 PM before release

Highlights

“The pandemic is kind of in the rearview, hopefully,” JPMorgan’s chief executive Jamie Dimon said on the earnings conference call.

Consumers are “raring to go,” bolstered by rising incomes, savings and house prices, while businesses are also in good shape, Mr. Dimon said.

  • Combined spending on debit and credit cards at the bank, which has $3.68 trillion assets, jumped 45% in the second quarter of this year from the second quarter of 2020, and is up 22% from the second quarter in 2019.
  • Travel and entertainment (T&E) spend, perhaps the hardest-hit sector during the pandemic, was flat in the second quarter compared to the second quarter of 2019, and rebounded strongly in June.
  • In April, T&E spend was down 11% compared to April of 2019, but in June T&E spend was up 13% from June 2019 as consumers are starting to spend more on travel and entertainment, and they’re also buying homes and cars at a faster clip, the bank said.
  • Its investment banking fees were the highest they had ever been, buoyed by a hot market for mergers and acquisitions.
  • Average loan balances grew 1% from the previous quarter, BUT the profits made on those loans through NII fell 8% year over year, as consumers continue to pay down their loans at a high rate given the build up of cash from savings and stimulus during the pandemic. There were some bright spots, however.
  • Credit card loan balances jumped 7% from the previous quarter.
  • Total mortgage and auto originations are up 64% and 61%, respectively, from the second quarter of 2020.
  • Total consumer loan balances are down 2% year over year because of all the prepayments.

 

JPM Q2 2021 earnings

 

NII Loan Guidance Lower

  • Commercial loan balances are still down 9% year over year, driven in part by lower utilization of revolving lines of credit.
  • This had been previously disclosed in June, JPMorgan has cut its NII guidance for the year from $55 billion to $52.5 billion, largely because the bank has chosen to stockpile cash instead of investing in the bond market.
  • The yield on the 10-year Treasury bond, has fallen in the quarter.
  • JPMorgan CFO Jeremy Barnum noted that while the $52.5 billion is JPMorgan's "central case," there is "elevated uncertainty" around the number because of the stimulus money consumers still have and the volatility in the market. He also said he expects the growing spend in debit and credit to eventually translate into credit card loan growth, but it may not be until 2022.

Trading revenue lower But still strong with record Investment Banking

  • Fixed income markets revenue fell 29% from the first quarter and 44% from the second quarter of 2020
  • Equity markets revenue dropped 18% from the first quarter, although it's still up 13% year over year.
  • Investment banking, however, had a record quarter with revenue up 20% from the previous quarter and slightly up year over year, primarily driven by the bank's advisory business and debt underwriting.
  • Overall, revenue in the CIB division came in at $13.2 billion for the quarter, down 10% from the prior quarter and 19% year over year.
  • Barnum said the bank expects revenue in the division to continue to normalize, although the timing is hard to predict.

Credit quality impproved leading to credit reserve release

  • JPMorgan reported net charge-offs (debt unlikely to be collected and a good indicator of potential losses) of $732 million, which is near historical lows.
  • The bank also provided guidance that said net charge-offs in its credit card segment are expected to be less than 2.5% of total credit card loans for the full year, which is very low.
  • Superb credit is also the reason the bank has released more than $11 billion from reserves previously stored away for potential loan losses back into earnings, largely as profits.
  • Barnum noted that these low levels of charge-offs do help offset the lack of loan growth and headwinds to NII.
  • The company’s confidence in the rebound was reflected in tJPMorgan indicated that its earnings received another boost from further net reserve releases of $3.0 billion, resulting in a $2.3 billion net benefit after net charge-offs.
  • It had set aside massive amounts for an expected onslaught of loan defaults that never emerged, thanks to robust government stimulus efforts that helped keep many Americans afloat.
  • Debt that the bank has given up trying to recoup fell 53 percent, “reflecting the increasingly healthy condition of our customers and clients,” Mr. Dimon said in a statement.

Outlook

JPMorgan did not provide any forward guidance in its earnings press release. The bank's next earnings report (for Q3 FY 2021) is estimated to be released on Oct. 13, 2021.7

CEO Jamie Dimon said, "You may have growth in the second half this year as strong as it's ever been in the United States of America."

Jeremy Barnum, JPMorgan’s chief financial officer. “We’re bullish on the economy,” Mr. Barnum said. “We believe that comes with higher inflation and, therefore, higher rates,” which will eventually allow banks to earn more from lending.

Still, the bank faces an incredibly broad range of outcomes tied to the coronavirus pandemic. 

Capital ratios

Banks are subject to many different capital requirements and ratios. Most banks are bound by the common equity tier 1 (CET1) capital ratio, which is a measure of a bank's core capital expressed as a percentage of its risk-weighted assets such as loans.

However during the pandemic, deposits flooded into the banking system, ballooning lots of bank balance sheets including JPMorgan's. As a result, the bank started to run up against another regulatory capital constraint called the supplementary leverage ratio (SLR), which is a measure of a bank's tier 1 capital expressed as a percentage of total assets and off balance sheet items.

Large banks must maintain an SLR of at least 5%. During the pandemic, the Federal Reserve applied an exclusion so banks didn't have to worry as much about the SLR, but that exclusion expired earlier this year. Now, the SLR is JPMorgan's binding regulatory capital ratio, and JPMorgan ended the quarter at 5.4%, not leaving a large cushion. JPMorgan's balance sheet grew because of the influx of deposits, but loans actually declined while those deposits were coming in, so while the bank got bigger, it didn't really get any riskier.

JPMorgan will have to closely manage the SLR by either turning away deposits from corporate customers, or raising capital through preferred and common stock raises. Near term it will likely lead to JPMorgan holding more capital than it would like to, or need to, if the CET1 ratio was the binding regulatory constraint.

 

Source: JPM, AlphaStreet

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