JP Morgan (JPM) - Earnings Reviewed

Happy Saturday all! We kicked off earnings season this week, as you all know and sure wasn't pretty. I'd anticipated a top line miss for JPM but a double miss for both JPM and Morgan Stanley doesn't sit well with me. And, to top it off BlackRock had a double miss too. I thought it might make sense to look into JP Morgan since, they cover all three - investment banking, commercial / corporate banking and retail banking.
 
 Before we begin, here's a cheat sheet for looking at bank earnings that I usually post every quarter. Banks have unusual ways of reporting and a different set of metrics by which they judge their results :

Here's a snapshot of their high level numbers:

Revenue was flat despite an increase in interest rates and an increase in firmware loans of 5%. What drove the decrease was non-interest revenue being down 12% overall because of the decrease in investment banking revenue, which actually decreased 54% globally. That's a steep decline and had it not been for the offset in higher rates and commercial lending, JPM would have taken a bigger hit.

Credit loss provisions have also increased for the second quarter in a row. It's normal for banks to take provisions, but increasing provisions every quarter is definitely not a healthy sign.

Combined debit and credit spend was up 15%. This is compared to a 21% increase from last quarter. Jamie Dimon continues to stress that the consumer remains strong and their ability to spend remains healthy. But, the question remains whether these spending trends are actually healthy and sustainable. Increased spending as measure by a bank’s standard could just be the effect of inflation and not necessarily more items purchased.

It is also a cause for concern that people are using their credit cards more. I keep saying, credit cards are the first to go, i.e., delinquency and default rates are higher on credit cards.

JPM’s stress capital buffer (SCB) had increased in June after the stress tests conducted by the Fed from 3.2% to 4% and their CET 1 capital requirement was up from 11.2% to 12%. This means that they need to keep more reserve capital aside.

Although Jamie Dimon did say on the call: "And we don’t agree with the stress test. It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious arbitrary", JPM is still taking it seriously enough to stop their share buyback program temporarily.

The other item that continues to be a problem is the increase in expenses. This quarter expenses were $18.7 billion, up $1.1billion or 6% YoY. This was primarily driven by increases in hiring. Given that their revenues remain flat, I would’ve wanted this to decrease.

The managed overhead ratio came in at 59% which mean it takes them 59c to generate $1 of revenue. This isn’t good. This should be much lower.

A few more numbers that tell you which way the economy is going:

We still have two major reports next week from Goldman Sachs and Bank of America on Monday before market open. Bank of America will be one to watch as well because it tells you how the average consumer is doing.