JPMorgan kicked off big bank earnings with a top-line beat. Adjusted revenue for Q3 was $30.44 billion, ahead of consensus ($29.86 billion) and near the top-end of the range.
EPS was $3.74, well ahead of an expected $2.97. Net income was $11.7 billion.
Notably, credit costs were a net benefit of $1.5 billion. That included a $2.1 billion net reserve release which Jamie Dimon was careful to qualify.
“We released credit reserves of $2.1 billion, as the economic outlook continues to improve and our scenarios have improved accordingly,” he said Wednesday. Last quarter’s release was $3 billion.
Dimon continued: “However, we do not consider these scenario-driven releases core or recurring profits [and] these reserve calculations, while done extremely diligently and carefully, involve multiple, multi-year hypothetical probability-adjusted scenarios, which may or may not occur and which may continue to introduce quarterly volatility in our reserves,” he added, noting that excluding the net reserve release (and an income tax benefit), earnings were $9.6 billion.
Everyone knows the benefits from reserve releases are temporary, so nobody should be disappointed when management reiterates the point. The fact they’re materializing is evidence that the worst case scenario from the pandemic didn’t unfold. Still, there’s a sense in which they make already opaque bank earnings even more difficult to parse. What’s not so difficult to discern is that $9.6 billion (JPMorgan’s earnings ex-reserve release) is a large number.
FICC was just in-line, which usually isn’t good enough from the market’s perspective. Revenue there was $3.67 billion, down 20%. Consensus wanted $3.7 billion. The drop will probably be forgiven, though, considering how out of the ordinary FICC was in 2020. The bank cited lower revenue in commodities, rates and spread products as compared to last year. In equities, performance was strong across the board. Revenue was up 30% to $2.6 billion.
Overall, markets revenue of $6.3 billion was down 5% YoY. Total markets and securities services revenue was $7.5 billion. Dimon described the drop in FICC as “continued normalization.” That’s not so much a euphemism as it is a statement of fact. FICC performance was anomalous in 2020 across Wall Street. The comps are distorted.
IB was strong for JPMorgan in Q3. Revenue of $3.03 billion was up 45% and represented a sizable beat. Consensus was $2.65 billion. Fees jumped 52% to $3.3 billion thanks to advisory and equity underwriting. Dimon touted a “surge in M&A activity” and the bank’s “strong” performance in IPOs. “JPMorgan Bankers Notch Record Quarter for M&A Advisory Business,” one headline declared.
The bank sees FY2021 NII around $52.5 billion, market dependent.
Dimon said the US economy “continues to show good growth, despite the dampening effect of the Delta variant and supply chain disruptions.”
He also noted that during Q3, JPMorgan “became the first bank to have branches in all of the lower 48 states, allowing us to serve more households, businesses and communities across the country.”
So, to America’s unbanked, just stroll on down to your brand new local Chase branch and deposit that check you don’t have. That’s the first step to realizing the American dream. Oh, and watch out for those overdraft fees.
Snark is obligatory right? At least mine isn’t gratuitous.
It sure sounds like there is no need to MAGAA, the first MAGA already AGA’d.
Another knee-jerk reaction at work that bears questioning. We are told “Bank stocks benefit when market rates rise, especially if the yield curve steepens.” That was based on the days of old when banks made most of their money from taking relatively low cost deposits and lending them at a higher rate. Does that still hold?
Perhaps for regional and local banks that still focus on traditional lending, But for the bigger money center banks it is not so clear. Recently their lending growth has been plateauing or moving lower. Their big profits are coming from M&A and trading. M&A benefits from LOWER interest rates, no? Funding is easier and companies get more inclined to buy growth through acquisitions. Sharply higher interest rates might curtail that business. Perhaps we have things backwards when it comes to the big boys, like JPM??
Steeper yield curve is good for the larger banks. It is good for market activity and lending. Flat curves indicate an economic slowdown coming, or the FOMC tightening or both. The shape and changing shape of the curve IMO is key for banks and securities firms.
Take the financial names and scatterplot beta to SP500 and beta to IEF (the latter being a quick and dirty measure of sensitivity to rates). There’s a clear pattern and some names will suggest themselves to look at.
Or, look for financials that fundamentally should get benefit from higher rates, but not be harmed by higher rates (or flatter yield curve). I’m thinking insurers.
Yes, the old saw has worked in the past. But I wonder if it will continue to hold if rates do go significantly higher. I read that Fintechs have taken a one-third and growing share of consumer lending. Isn’t that often the lucrative part of a loan portfolio?
And, thanks to Covid, retail customers have become even more comfortable with online banking. So it’s a lot more easy to shop around for the highest CD rates and lowest loan rates.
If earnings actually even matter, there may be some disappointing numbers when post-rate hike earnings are reported.
But investors still follow the old rule so there’s not much point in over-thinking this. Until there is.
I agree with that concern – fintechs are coming, and banking is a cyclical industry as well. Hence both approaches. Another would be to look at banks in other countries, where fintechs may (?) have a smaller footprint.
Your thoughts on the insurers has been spot on. We also used to look at payroll companies back when the float was chunkier. Even the custodians like BK.
Interesting idea on the foreign banks.
Would be interested in any further thoughts on foreign banks. I bought some UK banks mid last year after they were ordered to stop paying dividends, for the presumed eventual dividend resumption, but I’m not so interested in being there longer term. I’ve had some Canadian banks for at least as long, for different reasons, I feel a little more open to staying there. Eurozone banks feel uninteresting and Chinese ones are uninvestable, in my opinion. I haven’t looked at Australian banks in a couple years, MacQuarie was the only interesting one and it’s not actually a bank.
I mispoke or at least misled when I suggested that insurers aren’t exposed to the yield curve, their business models may not be but the security selection decision is: depending on the nature of their risk exposure they tend to invest longer or shorter. Some have turned into financial conglomerates competing with commercial banks and asset managers, those stories are a little too complicated for me.