JPMorgan Chase disappoints on loan loss reserves–bank sector earnings pop delayed
I wish I could be as optimistic about the first quarter results posted yesterday by JPMorgan Chase (JPM) as the stock market was. The market apparently focused on the 74 cents a share in earnings—a great big 11 cents a share above Wall Street projections. The stock climbed $1.86 or 4.04% on the news.
But I was looking to see if the bank had turned the quarter on loan loss reserves. When a bank stops having to deduct from earnings to reserve for growing bad loans, earnings per share can soar. As the big bank least damaged by the financial crisis, I expect JPMorgan Chase to signal a shift that will ripple out to banks all across the sector. And I was hoping to see signs in first quarter earnings that this shift would be upon us as early as next quarter.
Even JPMorgan Chase is still putting new money away to cover bad loans
Can’t anybody run a bank anymore?
I don’t mean an investment bank that makes its money from trading, managing stock and bond offerings, and inventing new financial instruments. That’s a good business these days for everybody from Bank of America (BAC) to JPMorgan Chase (JPM). (At Goldman Sachs (GS) it’s a great business.)
I mean a bank that takes deposits and makes loans through such bread and butter products as mortgages and credit cards.
JPMorgan Chase is one of the best in the business at that business. But even that bank, it admitted in its fourth quarter 2009 earnings report issued this morning (January 15) , just keeps generating losses in its traditional banking businesses.
Investors who were hoping to see signs that the end of trouble in retail and commercial banking was near have sent shares down 2.3% this morning (as of 11 a.m. in New York).
Saving the big banks but destroying banking
There have been no obituaries. No eulogies. No burial services.
But this quarter marks the death of traditional bank at the big money center banks.
Oh, I know we’ve seen amazing earnings reports from the likes of Goldman Sachs (GS) and JPMorgan Chase (JPM) this quarter. But their profits came from things like trading.
From everything in fact but what you and I—and certainly the preceding generation—called banking.
And it’s exactly those huge profits from everything but banking that have put the final nail in the big banks as bank.
Goldman Sachs and JPMorgan Chase and maybe Bank of America and Citigroup too will survive as financial institutions. But they won’t be banks.
That’s important because hate them though we may at the moment, banks play an important part in making our economy go. And the withdrawal of the nation’s biggest banks from traditional banking leaves a gaping hole in our economy. Perhaps other banks—smaller national banks and regional banks—can fill that hole. But it’s not certain. (I’ll be taking a look at the regional banks next week.) The absence of the big banks from traditional banking won’t bring the economy crashing down, but it will make the economy less efficient at a time when we need as much economic efficiency as we can get.
The model for what these big financial institutions will be is laid out in the most recently quarterly earnings reports from Goldman Sachs and JPMorgan Chase.
No big bad news is the biggest good news in JPMorgan Chase earnings
On the morning of October 14 JPMorgan Chase (JPM) reported third quarter earnings of 82 cents a share, way above the 50 cents a share expected by Wall Street analysts.
A nice surprise that.
The company also told investors that it had added another $2 billion to its reserves against losses in its credit card business. That brings total credit reserves at JPM Chase to $31.5 billion. Wall Street had been expecting that JPM Chase would add $1.4 billion or so to reserves.
Not the huge negative surprise that some on Wall Street feared.
The combination of better than expected earnings and only modestly worse than expected additions to reserves sent the stock up as soon as the stock market opened.
Credit card defaults move up again in August
Credit card portfolios at the country’s major banks showed a rising tide of defaults in August. That pretty much wiped out the hope the July’s numbers, which showed a glimmer of improvement marked any bottom in bad loans for the sector.
Consumers. whose spending accounts for about 2/3 of U.S. economic activity, are clearly still in deep trouble.
Among the big three of credit cards, Bank of America (BAC) reported the highest level of write-offs at 14.54%. That’s up from 13.81% in July. Citigroup’s (C) bad credit card loans rose to 12.14% in August, up from 10.3% in July, and JPMorgan (JPM) saw write-0ffs climb to 8.73% in August from 7.92% in July.
