Meteorological phenomena got short shrift in JPMorgan’s second quarter earnings materials, but Jamie Dimon did allude to the same oncoming economic storm that made headlines in June, when he warned of an approaching “hurricane.”
The world, Dimon said, is “dealing with two conflicting factors, operating on different timetables.” For now, the US economy is still growing (actually, it’s probably not growing in real terms, but I’ll leave that aside) and consumers are able to spend. But all of that could change.
“Geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road,” Dimon cautioned on Thursday.
His assessment echoed off-the-cuff remarks delivered last month at a conference sponsored by AllianceBernstein, where Dimon told an audience that although “right now, it’s kinda sunny,” there’s a “hurricane right out there, down the road, coming our way.” The only question, he mused, is whether “it’s a minor one or Superstorm Sandy.”
JPMorgan’s results were likely to disappoint markets. The bank came up short on both the top and bottom lines, and temporarily halted buybacks citing higher capital requirements. Adjusted revenue of $31.63 billion was short of the $32 billion consensus expected and EPS of $2.76 was likewise a miss (markets wanted $2.88).
Net charge-offs rose from Q1, and a $428 million reserve build was a drag on net income, which fell 28% from a year ago, when bank results were still benefiting from reserve releases. That juxtaposition (between last year’s releases and this year’s builds) was evident in both Consumer and Commercial.
As expected, IB was weak. That’ll likely be the case across Wall Street. Volatility is generally a boon to traders, but a bane for fees, which tumbled 54% YoY at JPMorgan, and 20% from Q1 (figure below). Equity underwriting, which should be particularly depressed this quarter, dove 77% from Q2 2021.
Total fees of $1.65 billion were down from $2.05 billion in Q1 and $3.57 billion in Q2 2021. JPMorgan’s total IB revenue of $1.35 billion counted as a large miss. The Street wanted $1.92 billion.
The bank’s trading results were passable. That’s not a ringing endorsement. FICC revenue of $4.71 billion was well below consensus ($5.11 billion). Equities was better ($3.08 billion versus $2.82 billion expected). Overall, markets revenue of $7.8 billion was up 15% YoY, but considering market conditions, some analysts may suggest the numbers could’ve been more robust. As Citi’s head of markets put it last month, “volatility is basically our friend.”
In Consumer, home lending revenue fell 26% from a year ago and 14% from the first quarter.
Mortgage origination volume dropped 45% from Q2 2021 (figure above).
The bank sees $58 billion in net interest income for 2022. That’s up from the $56 billion guidance the firm provided in May. Thursday’s update marked the third time in 2022 that JPMorgan raised its NII outlook for the year. More generally, net interest income should be a boon for banks as rates rise.
All in all, it’s probably fair to call JPMorgan’s results disappointing. Higher net interest income is obviously helpful, but misses on revenue and EPS, alongside the big IB shortfall and the underwhelming FICC print, not to mention the buyback suspension (warranted though it may be), don’t add up to a sunny set of numbers. I suppose that’s apt. After all, a hurricane is coming, large, small or somewhere in-between.
But don’t fret too much. As Dimon put it Thursday, “we are prepared for whatever happens.”
The storm has already started hitting Chinese banks. Presumably European banks will be hit soon. US banks may have the distinction of being the least worst.
Among other things I have done with my life, I worked a side gig as a bank consultant and studied banks. It didn’t take long to discover that in unsettled time, when many excuses for poor performance abound anyway, banks often take the opportunity to raise their reserves for loan losses. They figure what the heck, our income was going to be down anyway so lets take some extra reserve deductions. Even if the stock plunges, losses are only losses when they are realized so knowledgeable shareholders sit tight and wait for the good news. When the smoke has cleared and, yea, credit losses were not as bad as we thought so we can reduce our reserve — a move that boosts income in a big lump. Folks who knew this was coming bought the dip and wow, they made a bunch of money. Twiddling with the loan loss reserve is great sport, especially when those in the know actually know there will be an adjustment later.