JPMorgan Report Blowout Q1 Earnings Thanks To $5.2BN Reserve Release, Stellar Trading Results; Stock Drops
During a Q1 that was marked by steadily climbing interest rates and fresh record highs across equity markets, JP Morgan kicked off bank earnings season by beating on its expectations, but not by a wide enough margin to impress investors, who pushed the stock lower in reaction.
First, a quick look at what the bank reported at the top line:
- Adjusted EPS $4.50, smashing expectations of $3.09, and more than 5x higher than the 78c reported a year ago
- Adjusted revenue $33.12 billion, +14% y/y, also smashing expectations of $30.42 billion.
And yet, this blowout report apparently was not enough for investors, who quickly pushed JPM stock lower. A big reason – one quarter after US banks raised loan loss reserves by amounts similar to the global financial crisis, they are now releasing reserves en masse, and JPM certainly did so, with $5.2BN of the $14.3BN in net income the result of reserve releases. Net of Q1 releases, the bank’s total reserves in Q1 were $25.6BN, which according to Jamie Dimon “are appropriate and prudent, all things considered.”
In other words, ex reserve releases, EPS would have been just below $9BN, and the resulting EPS would be below $3.00.
To be sure, it wasn’t “just” reserve releases, and in the quarter, the bank did report stellar corporate and investment banking results:
- Investment banking revenue $2.85 billion, smashing the $2.46 billion estimate and 222% higher than the $886 million Y/Y. The bank said that IB fees were up 57%, “reflecting higher fees across products”, while YoY comparisons benefited from an “$820mm bridge book markdown in 1Q20.”
- FICC sales & trading revenue $5.76 billion, +15% y/y, and blowing out the $5.02 billion estimate; the outperformance here was predominantly driven by Securitized Products and Credit, largely offset by Rates and Currencies & Emerging Markets
- Equities sales & trading revenue $3.29 billion, +47% y/y, also blowing out the estimate $2.32 billion; the profit was driven by strong performance across products
The problem, of course, is that with volatility fading and the SPAC boom ending, the bank is unlikely to repeat this stellar corporate and markets performance in the second quarter.
On the expense side, the bank reported expenses of $7.1B, up 19% YoY, “predominantly driven by higher revenue-related compensation partially offset by lower legal expense.”
Some other data from the quarter:
- Net yield on interest-earning assets 1.69% vs. 2.37% y/y, estimate 1.81%
- Net charge-offs $1.06 billion, estimate $1.37 billion
- Basel III common equity Tier 1 ratio 13.1%
- Return on equity +23% vs. +4% y/y
- Assets under management $2.8 trillion
- Compensation expenses $10.60 billion, +19% y/y, estimate $10.12 billion
- Managed net interest income $13.00 billion, -11% y/y, estimate $13.31 billion
Commenting on the quarter, Jamie Dimon said that “in Consumer & Community Banking, consumer spending in our businesses has returned to pre-pandemic levels, up 14% versus the first quarter of 2019. We are also seeing good momentum in T&E with spend up more than 50% in March versus February. Home Lending originations were very strong, up 40%, with almost 75% of consumer mortgage applications completed digitally, but we expect this to slow with the recent rise in interest rates. Loan demand remained challenged as Card outstandings remain lower despite spend recovering to pre-COVID levels. Deposits were up 32% and investments were up 44%. In the Corporate & Investment Bank, we maintained our wallet share, Global IB fees were up 57% and Commercial Banking generated IB revenue over $1 billion. Corporate clients continued to access capital markets for liquidity and repay revolvers. In Asset & Wealth Management, continued strong investment performance, growth in new products and advisor hiring led to net inflows of $48 billion into long-term products. Also, AWM has seen strong and steady loan demand primarily to support business growth and mortgages.”
Summarizing the macro environment, Dimon said that “with all of the stimulus spending, potential infrastructure spending, continued Quantitative Easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth. This growth can benefit all Americans, particularly those who suffered the most during this pandemic. If all of the government programs are spent wisely and efficiently, focusing on actual outcomes, the benefits will be more widely shared, economic growth will be more sustainable and future problems, like inflation and too much debt, will be reduced.”
Good luck with the “spent wisely” part – you are, after all, talking about government.
In any case, it appears that as we previewed a few days ago, the earnings season has already been priced to perfection and despite the blockbuster beat, albeit largely on the back of reserve releases, the stocks is actually lower by about a dollar in premarkt, last trading at $153, down 0.75%.
The full investor presentation is below:
Wed, 04/14/2021 – 06:54