First quarter earnings season has officially started with JPM reporting Q1 results which were somewhat mixed (top-line beat, EPS miss) thanks to strong trading offset by weaker than expected IB revenues. The company's net interest income outlook was also raised for full year 2022 to $53BN from $50BN, and just to make sure that investors were happy, the bank announced a new $30BN share buyback, which perhaps was meant to cover up the fact that JPM reported an unexpected $524 million loss "driven by funding spread widening" as well as "credit valuation adjustments relating to increases in commodities exposures and markdowns of derivatives receivables from Russia-associated counterparties."
Starting at the top, JPM reported total adjusted revenue of $31.59 billion, above the exp. of $31.44BN resulting in EPS of $2.63, just missing the 2.73 consensus estimate, the lowest earnings since Q2 2020.
Among the notable highlights in the summary slide below is that the company's credit costs of $1.5 billion in Q1 - driven by net charge offs of $0.6BN and reserve build of $0.9BN - seem rather high. Dimon said that JPM added $902 million in credit reserves because of “high probabilities of downside risks.” That said, as Bloomberg notes, "while the reserve build of $902 million reflects higher probabilities of downside risks, current costs (net charge-offs) were actually a bit better than expected.”
Looking at JPMorgan’s taxes for the quarter, while the bank's so-called managed rate was 24.3%, its effective rate was 17.7%, an odd discrepancy. The bank says this “reflects fully taxable-equivalent (“FTE”) adjustments of $873mm in 1Q22.”
Commenting on the quarter, Jamie Dimon said that lending strength continued, with average firmwide loans up 5% while deposits rose 13%. The CEO also said that credit losses are still at historically low levels, and added that he remains optimistic on economy, at "least for short term."
“JPMorgan Chase generated a healthy $30 billion of revenue, $8.3 billion of earnings and an ROTCE of 16% in the first quarter after adding $902 million in credit reserves largely due to higher probabilities of downside risks. Lending strength continued with average firmwide loans up 5% while credit losses are still at historically low levels. We remain optimistic on the economy, at least for the short term – consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”
And speaking of loans and deposits, the bank disclosed total assets of just under $4 trillion, up more than $200BN from Q4 as deposits rose by ~$50BN to $2.516 trillion.
Next, focusing on the key division, corporate and investment banking, we find total Markets net revenue of $8.75 billion, which while down -3.3% y/y, beat the estimate $7.24 billion.
- FICC sales & trading revenue $5.70 billion, -1.1% y/y, beating the estimate $4.68 billion; the decline was "driven by lower performance in Securitized Products, predominantly offset by higher revenue in Currencies & Emerging Markets on elevated client activity in a volatile market"
- Equities sales & trading revenue $3.06 billion, -7.1% y/y, beating the estimate $2.56 billion and "driven by lower revenue in derivatives and Cash Equities compared to a strong prior year"
So far so good, but the big red light and the reason why the stock is not higher premarket is the miss in investment banking, where revenue was $2.06 billion, down -28% y/y, and missing the estimate $2.21 billion; According to JPM, "IB fees were down 31% YoY, reflecting lower equity and debt underwriting fees." The bank also noted some weakness in debt and equity underwriting, which analysts had been expecting.The breakdown as follows:
- Advisory revenue $801 million, estimate $860.8 million
- Equity underwriting rev. $249 million, estimate $426.5 million
- Debt underwriting rev. $1.00 billion, estimate $965.5 million
As BBG notes, here’s just how poorly equity and debt underwriting did: Equity underwriting was down 76% year over year and debt underwriting slumped 20%. That equity underwriting figure made my jaw drop a little -- they eked out just $249 million. That’s the lowest we’ve seen them post in the last five quarters and it’s not even close to the second-lowest figure of $802 million that they posted in the fourth quarter of 2021.
The weakness of Investment Banking revenue in context: this was the worst quarter since the covid crash.
And the broader Corp/IBanking group summarized:
Perhaps even more notable was JPM's admission that it suffered a half a billion dollar Ukraine-war linked loss: specifically, the bank disclosed that the loss of $524mm, was "driven by funding spread widening as well as credit valuation adjustments relating to both increases in commodities exposures and markdowns of derivatives receivables from Russia-associated counterparties." Expect many questions on the nature of this loss during the earnings call.
Moving on, we next look at Consumer & Community Banking, where deposits were up 18% and client investment assets were up 9%, largely driven by positive net flows.
Some more disclosure from the bank, which disclose several flashing red alerts due to rising rates:
- Combined debit and credit card spend was up 21% as we continue to see a pick-up in credit card spending on travel and dining. Card loan balances were up 11% but remain below pre-pandemic levels.
- Auto loans were up 3% but the lack of vehicle supply continues to affect originations which were down 25%.
- In Home Lending, originations of $25 billion were down 37%, primarily due to the rising rate environment.
- Commercial Banking loans were up 2% and we are seeing a pick-up in both new loan demand as well as revolver utilization.
- Asset & Wealth Management delivered strong results as we saw positive inflows into long-term products of $19 billion across all channels, as well as continued strong loan growth, up 14%, primarily driven by securities-based lending.”
Perhaps the biggest red flag here is that retail mortgage origination was down to $15.1 billion in the first quarter, which is 33% less than the fourth quarter and 34% less than a year ago. A pretty significant slowdown there.
Commenting on what were at best mixed earnings, Octavio Marenzi of Opimas writes that “JPMorgan’s Q1 earnings are the fairly dull bookend to a golden two-year period in banking. During the pandemic, RoE hovered close to 20%. Investment banking and trading did magnificently well, while loan losses remained extremely low. Now, with rising interest rates, JPMorgan’s earnings got clobbered, falling by over 40%. This is going to be the new normal in banking for the foreseeable future.”
There was an attempt to put some lipstick on the pig in the form of a new $30BN buyback authorization as well as a boost to the full-year NIM guidance to $53BN from $50BN...
... but with the stock sliding in the premarket, it appears that JPM has mostly left a bitter taste in investors' mouths.
The full earnings presentation is below: