JPMorgan kicked off big bank earnings on Tuesday, ushering in what’s been widely billed as the most uncertain reporting season in history.
Investors are flying almost completely blind and, frankly, so are management teams, as the ambiguity around the time table for reopening the US economy persists.
For banks, what matters most is credit trends or, more to the point, provisions for credit losses. After all, small businesses are going bust and with 17 million Americans (and counting) having filed for unemployment benefits in just three weeks, you’d certainly expect some deterioration in Main Street’s finances.
On the headline numbers, JPMorgan reported a 2.6% YoY drop in managed revenue, which came in at $29.07 billion.
Q1 EPS was $0.78. Net income was $2.9 billion, representing a 69% plunge, driven by firmwide reserve builds. EPS was also impacted materially by nearly $1 billion in losses on widening funding spreads for derivatives in CIB and almost $900 million in writedowns on held-for-sale positions.
“In Q1, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8 billion”, Jamie Dimon said. Total credit costs were $8.29 billion for the quarter.
The $6.8 billion reserve build from the prior year reflects “deterioration in the macro-economic environment as a result of the impact of COVID-19 and continued pressure on oil prices”, the bank explained. The breakdown shows a $4.4 billion build in Consumer, mostly in cards. The Wholesale reserve build was $2.4 billion, spanning several sectors. Not surprisingly, the biggest impact was seen in Oil & Gas, Real Estate, and Consumer & Retail industries.
The reserve build led to a 95% decline in consumer and community banking net income, where net revenue was down 2%. Consumer and business banking revenue dropped 9%, which JPMorgan blames on deposit margin compression. Home lending revenue dove 14%. Charge-offs were $1.3 billion, in-line with expectations and generally flat – one imagines the picture there may look quite a bit different next quarter.
Looking at commercial banking, net income dropped 86%, again due to credit loss provisions, while revenue fell 10% on lower deposit margins and markdowns on held-for-sale positions. Net charge-offs were $100 million, most due to Oil & Gas. That’s up $89 million compared to the prior year.
For once, trading is a sideshow for banks this quarter, taking a backseat to credit trends, which is somewhat ironic, given that volatility can lead to both opportunities and extreme peril.
FICC was a beat, as revenue came in at $5 billion, up 34% on “strong client activity”, especially in rates and currencies. Consensus was looking for $4.14 billion. At $2.2 billion, equities revenue beat too, rising 28% YoY on higher derivatives revenue (which makes sense, given the backdrop). The market was looking for $1.99 billion.
And yet, total markets revenue would have been nearly $1 billion higher were it not for a $951 million loss tied to widening funding spreads on derivatives.
IB revenue dove 49% to $886 million, a drop the bank says was due to an $820 million markdown on held-for-sale positions in the bridge book, including unfunded commitments in CIB and CB.
Net interest income income was $14.5 billion, up from Q4 and flat YoY. Q1 2019 was the high-water mark for Fed-assisted NII boosts. Banks came into last year expecting higher rates and continuing improvements in margins, but that’s all changed.
The bank on Tuesday slashed its fiscal year net interest income forecast.
Here’s a snapshot of the outlook from the bank, although clearly, the situation is the very definition of “fluid”.
Jamie Dimon had more to say than usual in the perfunctory commentary that accompanies the initial release of the results. Suffice to say these comments are anything but perfunctory.
From Dimon
My heart goes out to the communities and individuals, including healthcare workers and first responders, most deeply hit by the COVID-19 crisis. Throughout our history, JPMorgan Chase has built its reputation on being there for clients, customers and communities in the most critical times. This unprecedented environment is no different. We will do everything in our power to help the world recover from this global crisis.
The company entered this crisis in a position of strength, and we remain well capitalized and highly liquid – with a CET1 ratio of 11.5% and total liquidity resources of over $1 trillion. And JPMorgan Chase performed well in what was a very tough and unique operating environment – growing deposits in every line of business and providing loans as we extended credit and served as a port in the storm for our clients and customers. In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8B, resulting in total credit costs of $8.3B for the quarter.
The first quarter delivered some unprecedented challenges and required us to focus on what we as a bank could do – outside of our ordinary course of business – to remain strong, resilient and well-positioned to support all of our stakeholders. In Consumer & Community Banking, we have remained focused on meeting our customers’ needs. Approximately three quarters of our 5,000 branches have been open – all with heightened safety procedures and many with drive-through options – and the vast majority of our over 16,000 ATMs remain open. In March alone, we opened half a million new accounts for our card customers and extended over $6 billion of new and increased credit lines, and we were active in Home Lending and Auto. We lent over $500 million to small businesses in the month and we’re now actively supporting the SBA’s Paycheck Protection Program. For the quarter, we continued to see flows into both client investment assets and deposits.
We continued to support our wholesale clients throughout this challenging period, as they drew over $50 billion on their existing lines. We also provided over $25 billion of new credit extensions in March for companies most impacted by the crisis and helped our clients execute record Investment Grade bond issuances this quarter. In Commercial Banking, we partnered closely with clients on their liquidity needs, increasing loans $25 billion and deposits $40 billion in the quarter. The Corporate & Investment Bank turned in another solid quarter with record Markets revenue, as we helped clients navigate extremely tough and volatile market conditions, and we maintained our #1 rank in Global IB fees as clients turned to us for financing and advice. And in Asset & Wealth Management, we saw strong growth in both loans and deposits, we took in $75 billion in liquidity flows, and more importantly we proactively reached out and helped clients manage their risk. In addition, JPMorgan Chase made a $50 million commitment to help address the immediate humanitarian crisis, as well as the long-term economic challenges that the most vulnerable people face. And the firm announced a $150 million loan program to help community partners get capital to underserved small businesses and nonprofits, particularly in the hardest hit communities.
I want to thank our more than 250,000 employees for remaining steadfast in helping our clients, customers, communities and governments and continuing to operate with the highest standards every day. I’m proud of the extraordinary effort by our call center employees, traders, bankers, portfolio managers, technology and operations teams across the globe. I also want to thank Daniel Pinto, Gordon Smith, our Operating Committee and our senior leaders for the exceptional leadership they have shown under the most difficult of circumstances. Finally, the countries and citizens of the global community will get through this unprecedented situation, undoubtedly stronger for it. Together, we will rise to the challenge.
