JPMorgan Sets Aside More for Bad Loans and Suspends Buybacks after Earnings Miss

JPMorgan Chase kicked off second quarter earnings with worse than expected earnings. Investment-banking fees were down sharply, much like competitor Morgan Stanley had also reported as capital markets seized up. 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. Trading revenue rose15% to $7.8 billion but less than analysts had expected. JPMorgan shares already down 29% this year fell another 2.4% on the release.

john pierpont morgan
JP Morgan

Morgan Stanley also reported Thursday. BlackRock (NYSE: BLK) Wells Fargo (NYSE: WFC), Citigroup (NYSE:C), Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp will all report Friday through Monday.

JPMorgan Chase $JPM, America’s largest bank kicked off the banking sector’s Q2 22 earnings season on Thursday before the market opens. Last quarter JP Morgan blew away consensus expectations on both profits and revenues.

JPMorgan Q2 2022

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

  • 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.

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.

Source: JPM, WFC, C, BLK,

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