JPMorgan Says Made Billions In Bunches. M&A Doing Great
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
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.