The March quarter results from JPMorgan will force investors and analysts to rethink any optimistic assessments of how US banks performed in what was a pretty tumultuous three months – soaring inflation, surging oil prices triggered by the Russian invasion of Ukraine on February 24 turned out to have a greater impact than many had estimated.
Analysts had been looking for weaker results for the quarter from the banks, especially compared to a year ago when the profit figures were bolstered by write backs of loan loss provisions unused in 2020’s first wave of the pandemic and lockdowns which chilled economic activity for a short while.
Many analysts had pointed to expectations of a sharp rise in trading income for the banks in the latest quarter – that happened in the case of JPMorgan as the volatile market conditions from February onwards provided rich pickings for the huge trading rooms these big financial groups control. Many also set their bad debt and loan loss provisions a bit low (or it now seems they have after JPMorgan lifted its assessments which in the end sent quarterly earnings lower).
JPMorgan’s provision for credit losses told the story. The provision included a $US902 million reserve build for problems caused by the Russian invasion, was $US1.46 billion, more than double the $US617.5 million expected by analysts.
Bank accounting rules now force them be pre-emptive when assessing the adequacy of loan loss provisions – so if there is increased volatility or uncertainty about the economy – as there is now with rising inflation, interest rates, a possible slowdown and the Russian invasion of Ukraine – they have to allocate more money to their loan loss reserves.
That is what drove those huge loan loss provisions built in the first half of 2020 because of fears the pandemic would send unemployment higher, crunch the economy and trigger a surge in bad debts and losses – the first two happened, the latter didn’t and relieved major banks then released billions of dollars to their P/L accounts in early 2021 after they were not needed.
In Australia as well with the CBA, NAB, ANZ and Westpac all did the same in 2020 and 2021 (which helped in fact support the CBA’s huge $6 billion buyback). This is also known as dynamic provisioning and the results from JPMorgan and other banks will force our banks to take a look at their positions.
But the outlook for the Australian economy seems better than the US – inflation is not at the same levels as in the US (US producer prices in March rose an annual 11.2%!) and our huge commodity exports provide something of a cushion to the volatility in the wake of the Russian invasion of Ukraine. But we are facing a rate rise in June when the US will have had two, housing debt is very high but jobs growth is solid.
The provisioning rules saw JPMorgan take a $US902 million charge for building credit reserves for anticipated loan losses, compared with a $US5.2 billion release a year earlier. The bank also booked $US524 million in losses driven by markdowns and widening spreads after the Russian invasion of Ukraine in February.
Combined, the two factors cut 36 cents from the quarter’s earnings, the bank said.
JPMorgan said profit fell 42% from a year earlier to $US8.28 billion. Adjusted earnings per share of $US2.76, which excludes the 13-cent impact tied to Russia, exceeded the $US2.69 estimate of analysts. Including the 13 cents a share, EPS was $US2.63. In reality without the 36 cents a share write-off, they would have been close to $US3 a share.
Revenue dropped a more modest 5% to $US31.59 billion, topping analysts’ estimate for the quarter, helped by better-than-expected trading results.
But JPMorgan shares sold off after the early morning release and they fell 3.2%, touching a new 52-week low. The shares have lost around 16% over the past year and nearly 20% year to date in 2022.
The March quarter though illustrated how quickly events have changed the outlook for the big money banks.
A year ago, JPMorgan CEO Jamie Dimon was predicting sustained economic expansion and banks were reaping benefits as billions of dollars in loan loss reserves built in 2020 in the face of the Covid pandemic’s first wave, were being released and goosing earnings, dividends and helping justify big share buybacks.
Now there are growing fears about a recession (at least in the US) rampant inflation and the worst European conflict since World War II which shows no end.
Dimon in fact called attention to the possibility of a recession ahead in his results commentary.
Dimon said he built up credit reserves because of “higher probabilities of downside risk” in the US economy, specifically from the impact of high inflation and the Ukraine conflict.
“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,” Dimon said.
