JPMorgan Earnings Benefitting from Higher Interest Rates in Recession Haze

JPMorgan Chase $JPM, America’s largest bank kick off the banking sector’s third quarter earnings season on Friday before the market opens.  With the equity and bond markets continuing to slide investment-banking fees are expected to be down sharply again, much like competitor Morgan Stanley had also reported as capital markets seized up. However, JPM is expected to add net interest income with the bank seen to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates.

john pierpont morgan
JP Morgan

Last quarter JPM added to the $900 million set aside for potential future losses last quarter with another $428 million. The bank also temporarily suspended share buybacks.

BlackRock (NYSE: BLK) report Thursday. First Republic Bank (FRC), Coastal Financial (CCB), JP Morgan (JPM), US Bancorp (USB), PNC Financial Services (PNC), Morgan Stanley, Wells Fargo (NYSE: WFC), Citigroup (NYSE:C), Goldman Sachs Group Inc., and Bank of America Corp will all report Friday through Monday.

JPM Earnings Preview

Q3 2022 earnings release at 7 a.m. ET; conference call at 8:30 a.m. ET

  • Projected EPS: $2.92. Has fallen 4 cents a share from $2.96 a share in July, but it remains above the estimate of $2.80 a share on March 31, according to FactSet data.
  • Projected revenue: $32.13 billion

Investment Banking Losses

JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began. Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

JP Morgan Q2 2022 Earnings Recap

Q2 2022 earnings before the open; conference call at 8:30 a.m. ET Thursday

  • Profits fell 28% to $8.6 billion, or $2.76 a share. Analysts were predicting $8.9 billion.
  • Revenue $31.63 billion vs. $31.95 billion expected according to a Refinitiv survey.
  • Trading revenue jumped 15% to $7.8 billion while analysts had expected a 17% increase.
  • Fixed income trading revenue jumped 15% to $4.71 billion, but that was still below analysts’ $5.14 billion estimate for the quarter.
  • Equities trading revenue also jumped 15%, to $3.08 billion, beat the $2.96 billion estimate.
  • Credit costs of $1.1 billion, Jamie Dimon describing mounting economic uncertainty even as he emphasized the bank is prepared for “whatever happens.”
  • The $1.1 billion in provisions for credit losses included a $428 million build in reserves for loans that go sour and $657 million in net charge-offs, the company said.
  • The bank cited loan growth and “a modest deterioration in the economic outlook” as key drivers behind the spending.
  • Investment-banking fees declined 54%, more than the 47% drop analysts predicted
  • That division was also hurt by $257 million of markdowns on held-for-sale positions in the bank’s so-called bridge book, according to the earnings statement.
  • JPMorgan’s non-interest expenses rose 6% to $18.7 billion, lower than analysts were expecting. Executives had said they expect an 8.6% increase this year. 
  • Net interest income, a key source of revenue for JPMorgan, rose 19% in the second quarter on higher interest rates and loan growth. Analysts had expected a 16% increase. 

Shares of JPMorgan have dropped 29% this year through Wednesday, worse than the 19% decline of the KBW Bank Index.

Buybacks and stress test change to Tier 1 ratio

The buyback pause is needed to quickly meet higher capital requirements and “allow us maximum flexibility to best serve our customers, clients and community through a broad range of economic environments,” Chief Executive Officer Jamie Dimon said in a statement Thursday.

JPMorgan said regulators will require its common equity Tier 1 ratio to be 12.5% by the first quarter of next year, due to a harsher stress-test result and a previously flagged increase to its buffer for systemic importance. That’s up from a minimum of 11.2% at the end of June, and significantly higher than the 11.7% requirement that the firm told investors just two months ago to expect for early 2023.

The buyback break should allow the bank to get to 13.2% by next March, comfortably clearing regulators’ bar. However, that affects the cost of handing back money to investors: JPMorgan had averaged about $2.2 billion of buybacks a quarter over the past year, on top of $3 billion a quarter of dividend payments.

JPM adds to its Credit Charges and Losses from Q1

JPM Morgan added to its credit charges in Q2, a reminder of the Q1 charges.

JPMorgan took total credit charges of $1.5 billion. Of the $900 million set aside for potential future losses, about one-third was tied to Russia, Chief Financial Officer Jeremy Barnum said.

The rest, he said, is to account for the risk that interest-rate increases by the Federal Reserve could cause the economy to slow too much, resulting in a recession.

JPMorgan’s corporate and investment bank took $524 million in losses related to the bank’s commodities and Russia exposure, including $120 million in trading losses tied to nickel. JPMorgan is a top margin lender to Chinese metals giant Tsingshan Holding Group, whose giant short position on nickel plunged when the price of the metal surged after Russia invaded Ukraine.

Source: JPM, WFC, C, BLK,

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