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.
No such luck.
The bank did release $1 billion in credit card loan loss reserves. That was the kind of move I was looking for across the bank.
But JPMorgan Chase more than made up for that release by adding loan loss reserves for other types of consumer lending.
In its retail financial services business, which includes retail banking, and mortgage and other consumer lending the provision for credit losses in the quarter was $3.7 billion. That’s down from the fourth quarter but down a relatively scant $496 million. The loan loss reserves included $1.2 billion for further deterioration in the portfolios JPMorgan Chase purchased when it bought Washington Mutual.
But there were plenty of home grown problems too. The bank charged off $1.1 billion in home equity loans, even with the $1.1 billion in charge offs in the first quarter of 2009. Another $457million in charge offs came in the bank’s subprime mortgage portfolios. That was actually an increase from the $364 million in charge offs in the first quarter of 2009. Prime mortgage charge offs came in at $459 million, up from $312 million in the first quarter of 2009.
Management did say that delinquencies were down for all types of mortgages and for credit cards too. That’s a positive sign since today’s delinquencies have a nasty habit of becoming tomorrow’s bad loans.
But even that good news means that the turn in bad loans and loan loss reserves is still a way off.
How far off? Bank of America (BAC) reports before the open on Friday, April 16 and Wells Fargo before the open on April 21. Maybe those big banks will give investors the good news on loan loss reserves that JPMorgan Chase didn’t.
To chemace: The problem now is, if a big bank failed the govt would NOT rescue them because there is a general feeling of stability in the markets and seeing one bank go under wouldn’t scare anyone like it did when everyone thought the sky was falling and the financial system would fall apart. Another risk to banks IMO is the stock market that can not continue at this rate forever. The banks all profit from market investments too, and if that reverses I think we’ll see more pressure on banks, even if real estate related write offs don’t change.
I agree in part with Southof8. “Extend and pretend” is as hard a game to figure out as it is to fight the Fed. I own shares in a community bank that “thoroughly scrubbed” their loan portfolio about 9 months ago only to recently realize appraisal values were way too high. That’s the reason for having a margin of safety (excess capital above regulatory levels in this case). How the hell do I figure a margin of safety in C or JPM?
Besides, sub-prime resets are about to spike again, and the collateral behind these mortgages were valued much higher than those in the first spike. Who knows what that will or won’t do to the big banks. I surely can’t figure it out. Add that to current unknowns and these things are a complete gamble to me.
To give you all a good idea of my feelings on banks, I would sooner buy GM’s stock. At least I know the mess GM is in…
The actual unemployment rate is at 7.4% in MN.
Jim, is it possible jpm is simply being more conservative in its estimates of potential loan losses and reserving accordingly?
From my perch, the hay is in the barn on loans. The underwriting standards in place when the money went out the door dictates how much in charge offs will be required. I like the banks being conservative in their estimates; it sure beats the “we’re still dancing” mentality that pervaded the prior several years.
I still think USB is the best of the bunch because it employed the most discipline in its underwriting and is most trustworthy in the amount it’s reserving and charging off. It deserves its premium.
Citi’s a pig in a poke. I agree it might be a screaming good buy at under 5 bucks, but it might not. Pure guesswork. God knows what it’s hiding on its balance sheet or whether it is selling all the assets with value and keeping the cadavers. Without mark to market, at this point investing in banks is having blind faith in their leaders. Citi has not proven it deserves such faith.
Hi Jim,
I am do not see this almost polyana outlook going on right now in the markets. I work at a Community bank in the Mlps/St Paul area. This area is considered one of the stronger areas due to the diversity of industries and lower than national avg. unemployment rate 8.1%
I can tell you that community banks/smaller regional banks in this area are not lending $ to small business. Most banks are not going to risk more $ since most small business are telling their commercial lenders that they are still struggling. Bank regulators don’t want to see even the healthy banks take on new loans for fear they could get in trouble should the economy sputter.
If small businesses are not able to get loans to expand, start up or just survie I don’t see how we will get unemployment to come down.
Yes JP Morgan, Citi may be making $ from the trading areas of their business but I do not think that is a signal that the overall economy is about ready to take off like so many now think.
henry2009
i agree with you. it seems the government already proved they wont let these banks fail and they will be giving all the time and all the taxpayer money they need to slowly work through all the junk in their books. The stock prices for all the banks will climb JPM,BAC, C….30-50% over the next couple of years. Of course untill the next bubble
I have never had a good experience betting the “come” or getting in before the good news arrives.
Jim, the worldwide economy is recovering. If banks are not as good as we expected in the first quarter they will do it the next quarter. It is a step, even though a baby step, in the right direction. A tide will lift all boats. JPM and many banks will soon raise dividends. As investors we don’t wait until we get an all clear sign to invest in stocks. Otherwise you will be guaranteed to be always late in the game. JPM is actually not the most valuable bank to invest. The one is Citi as I mentioned a few times before. I mentioned when C was in the 3’s. I mentioned when C was in 4’s. Now I reiterate my strong buy on C when it is now in 5’s.