What JPMorgan's Q2 Results (Don't) Show
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
JPMorgan Chase (NYSE: JPM) surprised me, and perhaps most of the investing world, by reporting excellent earnings recently. I was expecting no more than $3.5 billion in after tax profits. Overall, JPMorgan reported earnings of $4.96 billion, or $1.21 per share. This was 9% below last year's second quarter of $5.43 billion, and 5% below the year ago's $1.27 per share. The per share comparison was better than the overall comparison due to JPMorgan's big buyback programs. The earnings are net of the trading losses out of the Central Trading Desk in London.
Let's look inside the numbers a little bit. The loan portfolio grew by about $40 billion, or 5% from the year ago quarter, to almost $728 billion. This growth was on the strength of mortgage and credit card receivable increases. But a flattening yield curve holding down net interest income was largely offset by a $2.1 billion lowering of the credit loss provision. The net is that overall interest income was only 2.0% below last year's second quarter.
On the other hand, a cynic would look at things quite another way. CEO Jamie Dimon had several times stated before that despite trading losses from the London Trading Desk, second quarter earnings would be "solid." He would have looked like a fool if earnings had plunged steeply from a year ago. $5 billion is a nice, solid earnings number, and it's almost as if management started with an idea in mind and then structured its costs to achieve that number. How else to explain, during a quarter of increased credit card and mortgage loans, the extraordinary drop in the loan loss provision of $2.1 billion from the second quarter of last year to the second quarter of this year? How about its reserve for litigation, which JPMorgan has been, and continues to be involved in on multiple continents? Last year's second quarter, the bank set aside $1.9 billion, and in the just concluded quarter it set aside $300 million. Take away those two factors, and JPMorgan's earnings would have been anything but "solid."
JPMorgan's quarter in general was built on paper credits, and had little to do with the investment bank, wealth management, or retail bank results, all of which were on the mediocre side.
JPMorgan's big investment bank continues to deal with skittish conditions in America and depressed conditions in Europe. It recorded $6.8 billion in revenue and recorded $1.9 billion in profits, including one of those pesky valuation adjustments, this time a positive pretax $755 million. But compared to either the first quarter of this year or the 2nd quarter of last year, the investment bank's revenues were down by over $500 million. Expenses, most related to employee pay and bonuses, were also down substantially, allowing the profits. The investment banking environment has been down so long that year to year comparisons are of limited value. In its heyday, the investment bank was earning over $10 billion per year.
Consumer revenue was driven down by lower non-interest revenues. Many banks have fully recovered from loss of revenue due to the Durbin Amendment, by having big increases in mortgage fee income driven by a flood of refinancing from those wishing to take advantage of historically low mortgage rates. JPMorgan's second quarter non-interest revenue of $11.1 billion was down 26% from last year's quarter.
That in turn led to overall revenue falling to $22.2 billion, off some $4 billion from the second quarter of last year.
The big bank's oft discussed trading losses were a surprise to me. I was not expecting the bank to write off its investment losses by the $4.4 billion pretax ($2.7 billion after taxes) it took. Helping offset that other than tax law was a gain of just over $1 billion pretax stemming from other trades. It is likely that another $1.5 billion to $2.0 billion in costs will arise from the trading debacle. Also just prior to releasing its earnings report, JPMorgan announced a downward revision of first quarter earnings by $459 million, owing to bank management no longer trusting the central trading office's abilities to value properly its synthetic credit portfolio.
I had hoped that JPMorgan would "come clean" with this quarter's earnings, take its medicine, and be in a position to move on in running its banking and investment banking franchises. By essentially eliminating its legal and credit reserve provisions in the second quarter to improve the appearance of its income statement, JPMorgan has done little more than shuffle papers around, and obscure the true nature of the quarter.
Visa (NYSE: V), Mastercard (NYSE: MA), and large banks including JPMorgan just announced a settlement of $7.3 billion in a suit brought mostly by retail trade groups on account of unfair debit card fee practices. While the specific amounts from each of the defendants has not been disclosed as of this writing, it is just another example of the legal entanglements that have beset JPMorgan and its ilk in recent years.
Bank of America (NYSE: BAC) got some notoriety for settling for $440 million in May of this year for improper overdraft charges due to banks ordering charges in anything other than chronological order. Yet, JPMorgan was sued for the same behaviors, and due to its smaller retail presence settled for $110 million. Just another black eye for the entire banking industry.
Going forward, job one for JPMorgan as an institution is getting on the straight and narrow and staying there for a time. Job two is turning around the revenue slide. In his letter to shareholders, Dimon wrote JPMorgan's earnings should be, on "an absolute and static basis", in the $23 to $24 billion range. By borrowing from the third and fourth quarters of this year to make the second quarter appear stronger than it was, JPMorgan is going to have to at least earn that much to earn my trust. JPMorgan may be the biggest bank in this country, but it is far from the best. I have to stay away from this bank until it reproves itself, and you might want to follow suit.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and MasterCard. Motley Fool newsletter services recommend Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
