JPMorgan Chase, America’s largest bank kicked off the banking sector’s first quarter earnings season on Friday before the market opened. The past month has seen the most banking turmoil since 2008, despite it JPM posted a 52% increase in first-quarter profit and record revenue of $38.35 billion, up 25%. The bank announced net income of $12.62 billion, or $4.10 per share, up from $8.28 billion, or $2.63 a share, a year ago. That beat the $3.41 per share expected by analysts, according to FactSet. Three of the largest U.S. lenders, Wells Fargo (WFC), Citigroup (C) and PNC (PNC) also reported Friday.
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 rose 49% to a record $20.71 billion, as its lending income more than doubled. With the equity and bond markets volatility investment-banking fees as expected were down sharply again.
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 Q1 2023 Earnings
Q1 2023 earnings released earnings at 6:45 a.m. ET; conference call at 8:30 a.m. ET
Highlights
- Net income of $12.62 billion, or $4.10 per share, up from $8.28 billion, or $2.63 a share, a year ago. Crushed the $3.41 per share expected by analysts, according to FactSet.
- Revenue rose 25% to $38.35 billion, a record. Analysts had expected $36.13 billion.
- Net-interest income: Up 49% to a record $20.71 billion, as its lending income more than doubled.
- Net-interest margin increased to 2.63% from 2.47% in the fourth quarter. It was 1.67% a year earlier.
- Deposits at JPMorgan surged by $37 billion from December to $2.38 trillion at the end of March.
- Investment Banking Revenue: Investment-banking fees fell 24% decline in revenue to $1.6 billion, just below the $1.67 billion estimate. CFO Barnum said in February that investment banking revenue was headed for a 20% decline from a year earlier.
- Fees for advising on mergers and stock and debt underwriting fell 19%
- Trading Revenue: Rose 7%. JPMorgan’s fixed income trading business beat expectations, posting $5.7 billion in revenue, or about $400 million more than expected. Equities trading revenue of $2.7 billion was below the $2.86 billion estimate.
- Consumer banking revenue: Rose 35% and profit rose 80%, powered by higher rates.
- Spending on credit cards rose 13% from a year ago.
- Loans on cards were up 18%, as customers aren’t paying off their balances as fast as they had been.
- Consumer mortgage originations plunged again as consumers slowed home buying and refinancing. The bank extended just $5.7 billion in mortgages in the quarter, down from $24.7 billion a year ago.
- Revenue from the bank’s growing payments operation rose 26%.
- Profit for the commercial bank profit rose 36%, revenue rose 11%
- Profit for asset and wealth management rose 1% to $1.13 billion.
- Set aside $1.1 billion for potential loan losses, saying it expects a moderate recession because of the tougher financial conditions.
- Took an $868 million loss on the sale of investment securities whose values have plunged with rising rates. This followed last quarter’s $874 million in losses selling some U.S. Treasurys and mortgage-backed securities, in Q4 it offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.
JPM: Stock Market Reaction
- 138.73▲ +9.74 (+7.55%) Morning
- 138.73 ▲ +12.67 (+10.05%) past year
- 138.73 ▲ +27.29 (+24.48%) past 5 years
- 52wk High $144.34
- 52wk Low $101.28
Benefit from an influx of deposits after Silicon Valley Bank and Signature Bank
JPMorgan saw “significant new account opening activity” and deposit inflows in its commercial bank, CFO Barnum said.
The money flows implied “an intra-quarter reversal of the recent outflow trend as a consequence of the March events,” Barnum said. “We estimate that we have retained approximately $50 billion of these deposit inflows at quarter-end.”
That helped cushion a larger trend of customers pulling money out of the regulated banking system as they realize they can earn higher yields in places like money market funds.
JPMorgan saw a 7% decrease in total deposits from a year ago to $2.38 trillion, slightly better than the $2.31 trillion estimate of analysts surveyed by StreetAccount. But, thanks to the recent inflows, deposits actually climbed 2% when compared with the previous quarter.
JPMorgan has played a central role in propping up a client bank, First Republic, which teetered last month, in part by leading efforts to inject it with $30 billion in deposits. Chief Executive Jamie Dimon, who helped lead the big-bank plan to backstop First Republic Bank, said the bank had acted as “a pillar of strength in the banking system.”
Investment Banking Losses
JPMorgan investment banking fees weakness has been exacerbated by a decline in large private-equity buyouts.
- Investment-banking fees fell 24% decline in revenue to $1.6 billion, just below the $1.67 billion estimate. CFO Barnum said in February that investment banking revenue was headed for a 20% decline from a year earlier.
- Fees for advising on mergers and stock and debt underwriting fell 19%
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?
- Took an $868 million loss on the sale of investment securities whose values have plunged with rising rates. This followed last quarter’s $874 million in losses selling some U.S. Treasurys and mortgage-backed securities, in Q4 it offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.
Outlook
Chief Executive Jamie Dimon said in a release “The U.S. economy continues to be on generally healthy footings — consumers are still spending and have strong balance sheets, and businesses are in good shape,”
“However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks,” he said, adding that the industry could rein in lending as banks become more conservative ahead of a possible downturn.
JPMorgan Last Quarter Earnings
Higher rates increase margins but there is a cost
With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues rose 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.
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years.
With concerns rising over the banking sector’s exposure to commercial real estate, asset quality at Pittsburgh-based PNC Financial Services Group is being scrutinized in earnings. Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn.
Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
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. JPM in Q1 2023 took an $868 million loss on the sale of investment securities whose values have plunged with rising rates. This followed last quarter’s $874 million in losses selling some U.S. Treasurys and mortgage-backed securities, in Q4 it offset those losses with a $914 million gain on selling some of the stock it holds in Visa Inc.
Source: JPM, WFC, C, BLK,
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