JPMorgan Earnings Boosted by Higher Interest Rates but Sets Aside $2.29 billion for Loan Losses

JPMorgan Chase JPM, America’s largest bank kicked off the banking sector’s fourth quarter earnings season on Friday before the market opened. $JPM reported net income of $11 billion, or $3.57 per share, up from $10.4 billion, or $3.33 a share, a year ago, beating the $3.08 per share forecast by analysts. Chief Executive Jamie Dimon warned the bank was preparing for what it now expects to be a mild recession, setting aside another $1.4 billion for potential worsening loan losses. Three of the largest U.S. lenders, Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) also reported Friday.

With the equity and bond markets continuing to slide investment-banking fees as expected were down sharply again. JPM benefited from net interest income with the bank’s more disciplined approach than others on deploying cash, and now has the opportunity to extend duration at higher rates. Net-interest income jumped 48% to $20.2 billion, exceeding the bank’s surprisingly high forecast of $19 billion.

john pierpont morgan
JPMorgan

For the full year, JPM’s revenue rose 6% to $128.7 billion, its fifth record year in a row. Profit fell 22% to $37.7 billion on the changing potential for loan losses.

JPM Q4 2022 Earnings

Q4 2022 earnings released earnings at 6:45 a.m. ET; conference call at 8:30 a.m. ET

Highlights

  • Net income of $11 billion, or $3.57 per share, up from $10.4 billion, or $3.33 a share, a year ago. Projected EPS: $3.11
  • Revenue: $34.5B Projected revenue: $34.29 billion
  • Net-interest income: Jumped 48% to $20.2 billion, a quarterly record that exceeded the bank’s forecast of $19 billion.
  • Net-interest margin increased to 2.47% from 2.09% in Q3
  • Investment Banking Revenue: $1.39B (exp $1.66B), revenue fell 9% and profit dropped 27%.
  • Fees for advising on mergers and stock and debt sales fell 58%,
  • Trading Revenue: Rose 7%
  • Consumer banking revenue: Rose 29% and profit rose 10%, boosted by the higher margins on loans.
  • Spending on credit cards rose 12% from a year ago and loans on cards were up 20% as U.S. consumers continued to spend.
  • Loans rose 5% as big- and medium-size businesses borrowed more.
  • Consumer mortgage originations plunged 84%, and auto originations fell 12%.
  • Profit for the commercial bank rose 15% to $1.42 billion. Profit for asset and wealth management rose 1% to $1.13 billion.
  • $874 million in losses selling some U.S. Treasurys and mortgage-backed securities, offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.
  • Able To Resume Stock Buybacks This Quarter with stronger profit
  • Quarter Includes $1.4B Net Reserve Build
  • Provision For Credit Losses: $2.29B (exp $2.05B)

JPM: Stock Market Reaction

  • 140.82 +1.33 (0.95%) Morning
  • 140.82 +5.7 (4.22%) YTD
  • 140.82 -27.41 (16.29%)) Over year
  • 140.82 +32.32 (29.79%) Over 5 years
  • 52wk High $157.27
  • 52wk Low 100.54

Investment Banking Losses

JPMorgan investment banking fees weakness has been exacerbated by a decline in large private-equity buyouts.

  • Investment Banking Revenue: $1.39B (exp $1.66B), revenue fell 9% and profit dropped 27%.
  • Fees for advising on mergers and stock and debt sales fell 58%,

Unrealized Losses on Investment Securities: How large are the losses, have losses been taken and are they hedged? This will affect ROE and EPS. Simply the value of assets held has been diminished, but by how much?

  • $874 million in losses selling some U.S. Treasurys and mortgage-backed securities,
  • Offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.

U.S. banks wrote down $1 billion in Q3 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.

Outlook

Chief Executive Jamie Dimon said in a release the economy remains strong today, though he cautioned that “we still do not know the ultimate effect of” headwinds like the war in Ukraine, monetary tightening and high inflation. 

JPMorgan Last Quarter Earnings

Analysts Outlook on Banks

RBC Capital MarketsGerard Cassidy

NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”

Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.

Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”

“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”

Wedbush

Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,

Barclays

Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”

Higher rates increase margins but there is a cost

With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks have continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter

However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.

Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.

FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.

Source: JPM, WFC, C, BLK,

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