Tuesday, 20 April 2010 13:58

An Unbiased Review of JP Morgan's Q1 2010 Results Yields Less Roses Than the Maintream Media Presents

The JP Morgan Q1 2010 review and analysis is available to download for all paying subscribers: JP Morgan Q1 2010 Review. Just this morning I posted an article describing how much of the mainstream media suffers from diminishing revenues due to the fact that they simply rubber stamp soundbites and produce reports that are simply cardboard cutouts of what is pushed out by Reuters and the AP.org. Well, JP Morgan's latest quarterly earnings release is a perfect example. Before you go on, I recommend reading "Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content?".

A scouring of the news from last week yields (and this is from the cream of the crop, may I add):

WSJ J.P. Morgan Earnings: A Beat!

We're off to another day of earnings and the big one of the day comes courtesy of J.P. Morgan Chase, which beat earnings expectations from Wall Street analysts on both the top and the bottom lines in its report out earlier this morning... Importantly, a big part of the better-than-expected performance on the bottom line came from J.P. Morgan socking away less cash to cover loans it expects to go bad. Dow Jones reports that J.P. Morgan’s managed credit-loss provisions were $7.01 billion, down from $10.06 billion a year earlier and $8.9 billion in the previous quarter... As we mentioned before, onlookers are hoping that this earnings season brings a bit more clarity to weather the worst is over for the banks, and J.P. Morgan’s results are a good sign.

J.P. Morgan Earnings Takeaways

Short version: We’re at an inflection point for the loan losses that have dogged banks... Just as a refresher, better credit trends can translate into better earnings for banks, as they move some of the cash they socked away to cover the losses they previously expected, and move that money back into the earnings column.

Reuters JPMorgan earnings set bar high for U.S. banks

JPMorgan Chase &  Co (JPM.N) reported quarterly profit that beat forecasts and set a high bar for rivals, as investment banking earnings gained, loan losses slowed and Chief Executive Jamie Dimon sounded an atypically optimistic note about the prospects for a strong U.S. economic recovery.

NYTimes.com: JPMorgan's Profit Soars Despite Downturn

Jul 17, 2009 ... A new order is emerging on Wall Street — one in which Goldman Sachs and JPMorgan Chase are starting to tower over former financial titans.

Now, here are some excerpts from my reader's subscriber material (JP Morgan Q1 2010 Review):

...Revenues from principal transactions accounted for 16.4% of the total revenues in 1Q10 against 3.6% in 4Q09 and 8.0% in 1Q09. The highly volatile nature of the trading revenues trickles down to create large fluctuations in the total revenues and income levels. Over the last six quarters, while the revenues from core investment banking and commercial banking has shown little recovery, the total net revenues have been recording substantial fluctuations.

JPM Q1 2010 trading revenues

Looking at the revenue growth in various segments in 1Q10, revenues from principal transactions more than doubled compared to same quarter last year to reach $4.5 billion. Income from core investment banking including advisory and underwriting grew 5.4% (y-o-y) to $1.4 billion. Asset management revenues increased 12.7% (y-o-y) to $3.2 billion. Business contraction in the commercial banking operations is reflected in the decline of the related revenue streams. Lending & deposit-related fees declined 2.5% (y-o-y) to $1.6 billion. Mortgage fees and related income declined 58.9% (y-o-y) to $0.6 billion and credit card income declined 25.9% (y-o-y) to $1.4 billion. The decline in mortgage and credit card related income emanated from a the decline in securitization transactions. In 1Q10, the total mortgage origination volume declined to $31.7 billion from $37.7 billion in 1Q09. See The Next Step in the Bank Implosion Cycle??? for a more on how this could end with Pan-European drama unfolding (a quick excerpt):

We have explored this in forensic detail for subscribers, and have offered a free preview for visitors to the blog: (JPM Public Excerpt of Forensic Analysis SubscriptionJPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download, and File Icon JPM Report (Subscription-only) Final – Professional, orFile Icon JPM Forensic Report (Subscription-only) Final- Retail as well as a free blog article on BAC off balance sheet exposure If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 – BAC).

bank_ficc_otc_exposure_jpm.png

Now, back to the present...

...The reported net interest income grew 2.6% (y-o-y) to $13.7 billion from $13.3 in 1Q09 largely owing to consolidation of securitized assets which added nearly $2.0 billion of net interest income.  The net interest income from the core portfolio declined due to contraction in interest earning assets. Total interest earning assets and total loans (after adjustments for consolidation of securitized loans in 1Q10) declined 4.5 %( y-o-y) and 14.0 %( y-o-y), respectively.

JPM Q1 2010 interest income

Interest income declined 6.0% (y-o-y) to $16.8 billion owing to continued contraction in interest earning assets. Interest expense came down 31.2% (y-o-y) owing to decline in borrowing costs (an increase in net borrowing costs, ie. Interest rates, will severely impact this bank’s bottom line). The interest rate spread improved to 3.24% owing to improvement in yield on interest earning assets as well as decline in average rate on interest earning liabilities.

However, the improvement in yield on interest earning assets was as result of consolidation of securitized loans. According to JPM reported figures, while the net yield on interest earning assets improved to 3.32% in 1Q10 against 3.02% in 4Q09, after adjusting for the consolidation of securitized loans, the net yield on interest earning assets declined marginally to 3.32% in 1Q10 against 3.33% in 4Q09.

JPM Q1 2010 charge trends

While marginal recovery was observed in delinquency rate trends, we feel JPM has been too quick to draw optimistic conclusions and has drastically reduced provisioning for loan losses. Of course, since such a provision reduction immediately improves accounting earnings (the fodder of Wall Street analysts) as well as numbing the following analysts and media in the case of an increase due to the constant barrage of credit losses. On one hand, the gross charge-offs increased sharply in 1Q10 largely owing to consolidation of securitized credit card loans, on the other hand, the provisions for loan losses were further cut, which led to reduction in allowance for loan losses. This is counterintuitive, and should have been picked up by all of those who proclaimed the “record quarter” for JPM! On a managed basis, the gross charge-offs increased 36% (y-o-y) to $8.5 billion from $6.2 billion in 1Q09, the provisions for credit losses declined 30.0% to $7.0 billion from $10.0 billion in 1Q09.

...The delinquencies of JPM’s total portfolio showed some sign of moderation, but are still at elevated levels. However, further deterioration is still observed in the acquired real estate portfolio of WaMu. We alleged that this would be the case in February of last year: Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!

A quick excerpt from early last year...

...While the compensation expense declined marginally to $7.3 billion against $7.6 billion in 1Q09, the total non-interest expense increased to $16.1 billion from $13.4 billion in 1Q09 owing to increase in other expenses. The increase in trading revenues trickled down to the bottom line resulting in net income increasing to $3.3 billion in 1Q10 from net income of $2.1 billion in 1Q09. Diluted EPS in 1Q10 was $0.74 per share against a loss of $2.6 per share in 1Q09.

In parting, let me leave you with one of my favorite JPM Graphics...

Earlier JP Morgan Analysis

If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan

Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!

Anecdotal observations from the JP Morgan Q2-09 conference call

The JP Morgan Public Preview Forensic Report

Reggie Middleton on JP Morgan's Q309 results

Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results

An Independent Look into JP Morgan

The JP Morgan Professional Level Forensic Report

The JP Morgan Retail Level Forensic Report

Last modified on Tuesday, 20 April 2010 14:00

3 comments

  • Comment Link Reggie Middleton Thursday, 29 July 2010 13:22 posted by Reggie Middleton

    It's a typo. A trillion here, a trillion there...

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  • Comment Link pcp Thursday, 29 July 2010 13:19 posted by pcp

    Should that be 21 billion or 21 trillion? But then again, what's a trillion among friends?

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  • Comment Link Reggie Middleton Friday, 23 April 2010 04:01 posted by Reggie Middleton

    More on JPM's Managed Basis earnings management:

    "Effective January 1, 2010, the Firm adopted the new accounting guidance for consolidating VIEs and consolidated the assets and liabilities of its firm-sponsored credit card securitization trusts. The income, expense and credit costs associated with these securitization activities are now recorded in the 2010 Consolidated Statements of Income in the same classifications as for credit card loans that were not securitized. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. Prior to January 1, 2010 the Firm's managed basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by Card Services remained on the Consolidated Balance Sheet. JPMorgan Chase used this concept of managed basis prior to January 1, 2010 to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio as operations were funded and decisions were made about allocating resources, such as employees and capital, based on such managed financial information."
    http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=458901

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