5 key takeaways from JPMorgan Chase’s second quarter results
JPMorgan Chase (NYSE: JPM), the largest US bank by assets, kicked off the earnings season for the second quarter of the year, generating diluted earnings per share (EPS) of $ 3.78 for total revenue of nearly of $ 30.5 billion. EPS and revenue both exceeded analysts’ expectations, although JPMorgan also released an additional $ 3 billion of previously stored loan loss reserves into earnings, which gave the profit a $ 0.75 advantage. BPA. Here are five takeaways from JPMorgan’s results.
1. The economic recovery is well underway
The economic recovery that so many experts and economists have spoken of is officially underway. The combined debit and credit card spending of the bank, which has $ 3.68 trillion in assets, jumped 45% in the second quarter of this year from the second quarter of 2020 and 22% from the second quarter of 2020. in the second quarter of 2019.
Travel and entertainment (T&E) spending, perhaps the hardest hit sector during the pandemic, was flat in the second quarter compared to the second quarter of 2019 and really rebounded in June. In April, T&E spending was down 11% from April 2019, but in June, T&E spending was up 13% from June 2019. CEO Jamie Dimon said: “You could have a growth in the second half of this year as strong as it has ever been in the United States of America. “
2. Loans barely increased, while NII slipped
Investors and analysts have been watching closely for the first signs of real loan growth. But as the economy rebounds sharply, that hasn’t translated into the kind of loan growth or net interest income (NII) that banks would have hoped for. The good news is that average loan balances increased 1% from the previous quarter, but profits made on these loans through NII fell 8% year over year as consumers continue to repay. their loans at a high rate given the accumulation of liquidity. savings and stimulus during the pandemic.
There were, however, a few bright spots. Credit card loan balances jumped 7% from the previous quarter. Total mortgage and auto originations are up 64% and 61%, respectively, from the second quarter of 2020. However, total consumer loan balances are down 2% year-on-year. other due to all prepayments. Commercial loan balances are still down 9% year-over-year, in part due to lower use of revolving lines of credit.
As previously reported in June, JPMorgan cut its NII forecast for the year from $ 55 billion to $ 52.5 billion, largely because the bank chose to store cash instead of investing in the market. bond. The move appears to be a good move, as the yield on a popular security that banks invest in, 10-year Treasuries, declined significantly in the quarter.
JPMorgan CFO Jeremy Barnum noted that although the $ 52.5 billion is the “central case” for JPMorgan, there is “high uncertainty” around the number due to the stimulus money available. still consumers and market volatility. He also said he expects rising debit and credit spending to eventually translate into growth in credit card lending, but it may not be until 2022.
3. Standardization of the income of corporate and investment banks
Everyone was waiting for JPMorgan’s corporate and investment banking (CIB) division to calm down after posting phenomenal profits during the pandemic, and some areas started off slow. Income from fixed income markets fell 29% from the first quarter and 44% from the second quarter of 2020, while income from equity markets fell 18% from the first quarter, although they are still up 13% year over year.
However, the investment bank had a record quarter with revenues up 20% from the previous quarter and slightly up year on year, mainly thanks to the advisory and debt underwriting activities of the bank. Overall, CIB division revenue was $ 13.2 billion for the quarter, down 10% from the previous quarter and 19% year-over-year. Barnum said the bank expects the division’s revenue to continue to normalize, although the timing is difficult to predict.
4. Better than expected credit quality
Hardly anyone has talked about credit quality over the past few months because it has been incredibly good this year. Between the end of 2019 and the end of the third quarter of 2020, JPMorgan increased its total allowance for credit losses by more than $ 19 billion. Considering that a pandemic shut down massive parts of the economy for weeks and months at a time, it made sense with billions in expected losses.
But thanks to the trillions of dollars pumped into the economy from federal stimulus measures, Federal Reserve intervention, and the effective deployment of several COVID-19 vaccines, loan losses have not grown significantly. part not materialized.
JPMorgan reported net write-offs (debts unlikely to be collected and a good indicator of potential losses) of $ 732 million, which is near all-time lows. The bank also said net write-offs in its credit card segment are expected to be less than 2.5% of total credit card loans for the full year, which is very low.
Exceptional credit is also the reason the bank released more than $ 11 billion of previously stored reserves for potential loan losses into profits, much of it in the form of profits. Barnum noted that these low write-off levels help offset the lack of loan growth and headwinds for NII.
5. A new binding capital ratio … for now
Banks are subject to many different capital requirements and ratios. Most banks are usually bound by a particular ratio, called a Tier 1 (CET1) capital ratio, which is a measure of a bank’s capital base expressed as a percentage of its risk-weighted assets such as the loans. But during the pandemic, deposits poured into the banking system, inflating many bank balance sheets, including that of JPMorgan.
As a result, the bank began to run into another regulatory capital constraint called the Additional Leverage Ratio (SLR), which is a measure of a bank’s Level 1 capital expressed as a percentage of total assets and non-core items. balance sheet. Large banks must maintain an SLR of at least 5%. During the pandemic, the Federal Reserve applied an exclusion so that banks don’t have to worry as much about SLR, but that exclusion expired earlier this year.
Now SLR is JPMorgan’s binding regulatory capital ratio, and JPMorgan ended the quarter at 5.4%, not leaving a huge cushion. Dimon has long been frustrated with regulatory requirements like SLR because it is not always risk-based. JPMorgan’s balance sheet grew as much as it did due to the influx of deposits, but the loans actually declined as those deposits came in, so as the bank got bigger it didn’t really get riskier. .
JPMorgan will need to closely manage the SLR by refusing deposits from corporate clients or raising capital through increases in preferred and common stock. Regulators could eventually change how SLR works, so it probably won’t be binding forever, but in the short term, this will likely lead to JPMorgan holding more capital than it wants or has. need if the CET1 ratio was the binding regulatory constraint. .
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.