So far, so good for bank stocks.
This morning, July 14, JPMorgan Chase (JPM) reported second quarter earnings of $1.09 a share. Not only was that a 289% increase from the second quarter of 2009 but it beat Wall Street projections for a 159% jump in earnings and earnings of 73 cents a share.
Some—myself included—had worried that Wall Street expectations for bank earnings had gotten way ahead of themselves and that banks would be unlikely to meet those projections. (For more on that worry see my post July 7 post Watch for a buying opportunity on my watch-list banks if earnings disappoint this quarter .)
You can take that worry off your list.
But that’s not to say that Wall Street hasn’t found something to worry about in these numbers. The concern boils down to a banking specific version of the stock market’s general worry about economic growth. The surge in earnings, bank analysts are pointing out this morning, is due to a big reduction in provisions against loan losses. That’s fine if the bank has pegged the turn in the credit markets correctly. But if the economy is weaker than expected, these reductions won’t be repeated in future quarters and might even need to be reversed.
That plus the company’s caution in its just concluded conference call has muted the response to the earnings surprise. The shares opened at $40.72, just 37 cents a share above the previous close.
The big story in the earnings report was a huge drop provisions against bad loans. After seeing earnings take a hit quarter after quarter as the bank put aside more money against potential losses from bad loans, the trend is now working in the bank’s favor with cuts in loan loss provisions adding to earnings. For example, JPMorgan Chase cut loan loss provisions in its retail banking unit by $2 billion in the quarter. In the credit card business, a problem area during the recession, the bank cut loan loss provisions by $2.4 billion. That helped the credit card business earn $343 million against a loss of $672 million in the second quarter of 2009.
Not all the news was great in the quarter. As expected, revenue from fixed-income fell for the quarter to $3.6 billion from $4.9 billion in the second quarter of 2009. Net income from investment banking fell by 6% from the second quarter of 2009.
JPMorgan Chase was extremely cautious in its conference call, saying it expected home prices to continue to decline “a little bit more” and refusing to put a date on when the bank might begin to raise its dividend toward pre-financial crisis levels.
Banks! There’s no more opaque market sector. Most of what they report is nothing other than taking money out of one pocket and putting it in another. If ever they adjust their compensation levels to something closer to reality and economic value to society as a whole, maybe they will be showing signs of evolving from what is now little more than a Ponzi scheme.
You’ll see some Homeowners with $1.5 M or more houses,that are upside down,paying no payments for 5-10 years. You will eventually get foreclosed on at a sub 800k price point but at the upper end, you’re getting a free place to stay for years.
I had a problem with bank of America when they charged maintainance fees to my not my 5 year old son’s savings account because it did not have enough money in it. They were suppose tolink it to my accounts so it would meet the minimum dollar ammounts but failed to do so. When I spoke to them about this they refused to return the money. In other words they stole money from a 5 year old. U will never do bussiness with them again. I now bank with USAA. They are great.
I have had a problem with Chase for over a year. The turn off credit card alerts, sending me an email notification. every month on the same day. I’ve gotten as far as the “executive office”. They can’t figure it out, can’t fix it. In other words they can’t control their own computer systems.
I wouldn’t trust any numbers coming from Chase.
Two reasons….trust (or lack thereof) and the still negative real estate market. The govt tried to fix the trust part (we will see) but now as the RE market drops, more people are trying to get out from under being upside down. This is going to drag on banks and other mortgage holders for years. I don’t dare invest in either REITS now; but someday.
Sigli
It is interesting that you mentioned banks are forclosing very slowing. In my brothers neighborhood, in Palm Harbor Fl just north of Clearwater, his neighbor has not paid his mortgage in over two years. He has saved $50,000 in that time. I don’t know which bank holds the mortgage. If property values keep falling, which it seems like they will since jobs are hard to come by there, then more people will just walk away. These are nice houses which were around $400,000 at the peak of the market. They are now worth about $240,000.
Yeah, New Century paid a dividend too. I think it got as high as 19%.
McDonalds, Verizon and a million “real” investments pay dividend. My humble thought is there are plenty of girls at the dance without well hidden (to some people apparently) cold sores, why take the chance?
Over the last couple of years most of the bank stocks have become dividend plays. Now that most of the banks have cut their dividends to little or nothing, they have lost their luster for those that are seeking income. I think a better reaction will come as these dividends will get restored and people see a real rate of return.
Gotta laugh when even non-banking guys (I assume???) know the game. Just ask yourself 1 question about Chase’s books…… what value do they place on all those seconds they made on $2m houses in Calabasas (CA). If they’re valued at 6-8 cents on the dollar, then maybe you can trust their numbers.
Extend and pretend. This doesn’t mean in a rigged game like this, you can’t make any money. It just means, as investments……. Puhhhhleaze.
And Citi makes Chase look like the best run, most honest Bank in history. Double Puhhhhhleaze.
Javos, there won’t be accurate Marks for decades. Mark to Market is so 2006!
Amen to johnson555 and Run26.2. Further, when will FASB succeed in making banks mark their rotting residential assets to market?
Pull up a quote on XLF, then scan the 1 year price profile of each of its holdings. That will tell what smart money thinks of banks.
Wasn’t much of JPM numbers due to lower loss reserves rather than better business ?
I’m waiting in anticipation for the credit analyst reports to come out this quarter. Last quarter showed banks accounting for LESS loan loss provisions on mortgage loans while the loan deterioration accelerated. This is always seen as a huge red flag to the regulation and investment communities.
Another important point is that anecdotal evidence suggests people are not paying their mortgages and essentially getting free rent (because the banks are foreclosing extremely slowly). This gives provides tons of extra cash to pay those credit card bills. See Discover’s last quarter. It looked great. They’re elated that write-offs have decoupled from unemployment. That’s good for the credit card business, but isn’t normal. That says something funny is going on. Best educated guess is that credit cards are being serviced at the expense of mortgage loans.
With that said, if you’re going to buy banks then look for the ones with higher leverage to consumer credit and lower to mortgages.
johnson555… totally agree on JPM (or any bank for that matter). The big banks just push numbers around once earnings come up and they may or may not have any basis in reality. Kind of like the old saying “if their lips are moving, they must be lying”
Off Topic: 73% of Americans Oppose Deepwater Drilling Ban:
http://www.bloomberg.com/news/2010-07-14/americans-in-73-majority-oppose-ban-on-deepwater-drilling-after-oil-spill.html
It’s pretty simple why investors aren’t jumping at the chance to buy JPM, you can’t trust their numbers. It’s just Lucy holding the football for Charlie Brown.
Jubak, so where do you see BAC and C coming in on earnings on Friday? Greater, same, or below JPM? Will their expected earnings increase boost the financial sector as a whole?