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Friday, 16 July 2010 14:01

After a Careful Review of JP Morgan's Earnings Release, I Must Ask - "What the Hell Are Those Boys Over at JP Morgan Thinking????"

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JPM is leaving no stone unturned to prop up the operational performance and give out green signals, even if it involves the most unsustainable measures. While in 1Q10, trading income came to the rescue of the sagging core operations, in 2Q10, it was management’s over-exuberance (defying logic and rationality, to some extent) resulting in drastic reduction in loan loss provisioning and beefing up the bottom line. Although the credit quality has shown slight improvement (thanks to the enormous fiscal and monetary stimulus), it does not completely warrant for JPM’ unhealthy and hasty decision to substantially pare its loss provisions. I know many financial pundits second guess management as arm chair coaches, but when management error is egregious, well let’s let the numbers speak through graphics….

As Excerpted from As I Made Very Clear In March, US Housing Has a Way to Fall:

Trust me, the collateral behind many more mortgages will continue to depreciate materially as government giveaways and bubble blowing for housing fade!

The delinquency and NPA levels drifted down a bit, but they are still at very high levels. Charge-offs came down but the reduction in provisions has been quite disproportionate bringing down the allowance for loan losses. In 2Q10, the gross charge- offs declined 26.6% (q-o-q) to $6.2 billion (annualized charge off rate – 3.55%) from $8.4 billion in 1Q10 (annualized charge off rate – 4.74%). But the provisions for loan losses were slashed down 51.7% (q-o-q) to $3.4 billion (annualized rate – 1.9%) against $7.0 billion (annualized rate – 3.9%) in 1Q10. Consequently, the allowance for loan losses declined 6.2% (q-o-q) from $35.8 billion from $38.2 billion in 1Q10. Non performing loans and NPAs declined 5.1% (q-o-q) and 4.5% (q-o-q) respectively. Thus, the NPLs and NPAs as % of allowance for loan losses expanded to 45.1% and 50.7%, respectively from 44.6% and 49.8% in 1Q10. Delinquency rates, although moderated a bit, are still at high levels. Credit card – 30+ day delinquency rate was 4.96% and the real estate – 30+ day delinquency rate was 6.88%. The 30+ days delinquency rate for WaMu’s credit impaired portfolio was 27.91%.

While the lower provisioning was able to beef up the bottom line in this quarter, the same is not sustainable in the future as JPM cannot afford to reduce its allowance for loan losses substantially. This is a one shot, blow your wad and go to sleep deal! There is no margin for error in the future, and one can only assume that the reason this was done was to pad accounting earnings and to take advantage of the extremely short term, and obviously naïve, memory of the financial media and retail/institutional investor. Given the high charge-off rates and delinquency levels, the provisioning will probably need to be bolstered again in the not too distant future.

Listen, even US Economic Cheerleader and Propaganda-in-Chief Ben Bernanke said it will be several years before growth and employment resumes. Sooooo…. What the hell are the boys (and girls) at JP Morgan doing????

The reduced provisioning can help improve bottom line, but it cannot conceal the weakness in core operations as reflected in the sagging revenues especially in the investment banking segment. Total net revenues declined 9.3% (q-o-q) and 2.0% (y-o-y) with non interest revenues declining 11.1% (q-o-q) and 4.2% (y-o-y) and net interest income declining 7.5% (q-o-q) and remaining flat on y-o-y basis. Trading revenues which witnessed a huge surge and underpinned the revenue growth in 1Q0 was seen moderating in 2Q10 in lieu of the high volatility recorded in the capital markets recently. Revenues from principal transactions declined 54.0% (q-o-q) and 32.5% (y-o-y) to $2.0 billion. Investment banking fees were down 2.7% (q-o-q) and 32.5%(y-o-y) to $1.4 billion with most of the weakness coming from Europe (If you are wondering why, reference our Pan-European Sovereign Debt Crisis series). Lending & deposit-related fees declined 3.6% (q-o-q) and 10.2% (y-o-y) largely driven by declining deposit fees. Only non interest income that was seen growing was mortgage and credit card fees due to improved volumes and activity in these segments and even this revenue stream may come under attach under new legislation.

The rest of this Q2 review can be downloaded by subscribers (click here to subscribe) here: JPM 2Q10 review

Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:

The JP Morgan Professional Level Forensic Report (subscription only)

The JP Morgan Retail Level Forensic Report (subscription only)

Those that don't subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from "An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Maintream Media Presents"...