JPM Conf Call notes

Transcripts are provided by Motley Fool, which is a great free service offered by TMF for individual investors. Thank you TMF.

https://www.fool.com/earnings/call-transcripts/2022/07/14/jp…

Few key points… I grouped them by some talking points, from the prepared remarks, Q&A and in between my comments.

Net Interest Income
You will recall that at Investor Day, we expected NII ex Markets for 2022 to be in excess of $56 billion. We now expect it to be in excess of $58 billion, reflecting Fed funds reaching 3.5% by year end. JPM in their investor day projected $66 B NII, now it is upped to $68 B, and that’s the 4Q 2022, now 2023, will be building on top of 4Q 2022, so expect NII to hit $70 B. Note, this is just the revenue, expenses, credit losses are different story, but NII income is going to raise across banking sector robustly. Citi which announced the results today showed NIM (net interest margin) moved up by 10% to 2.24%. Citi’s performance is driven by US rate hikes, when the ROW joins it can go even higher.

Credit
Credit is still quite healthy, and net charge-offs remain historically low. And there continue to be positive trends in loan growth across our businesses. In terms of actual credit performance this quarter, credit costs were $761 million

consumer Spend is still healthy with combined debit and credit spend up 15% year on year. The average consumer is spending 35% more year on year on gas and approximately 6% more on recurring bills and other nondiscretionary categories. Card outstandings were up 16%, and revolving balances were up 9%.

Capital
The new 4% NCB will raise our standardized CET1 requirement to 12% effective in the fourth quarter, and the 4% G-SIB effective in 1Q '23 further raises this requirement to 12.5%.

Steve: I don’t believe you’ve provided an update on your firmwide CET1 target of 12.5% to 13%. And given the new higher SCB, future increases in your G-SIB surcharge to 4.5%, your regulatory minimum is slated to increase beyond 13% by 2024?

Yes, Steve. Good question. So obviously, you’re right in the sense that we didn’t talk about 2024 on the slide. And as you note, have two G-SIB bucket increases coming, one in the first quarter of '23 and the other one in the first quarter of '24.

So we had worked all that out on Investor Day and talked about 12.5% to 13% target, which implies sort of a modest buffer to be used flexibly based on what we expected would be some increase in SCB. Obviously, the increase came in a bit higher than expected. So for now, we’re really focused on 1Q '23. Of course, all else equal, you would assume that, that 12.5% to 13% for 2024 would be a little bit higher.

In prepared remarks:
our organic capital generation allows us to rapidly build capital in excess of future requirements with a current target of roughly 12.5% in the fourth quarter… Turning to this quarter’s results, you can see that our CET1 ratio of 12.2% and is up 30 basis points from the prior quarter.

JPM earnings’ slide 3 with the title Fortress balance sheet walks through how they are going to get to 13% CET1 from current 12.2%, so outside of dividends they are going to retain all of the capital is how.

At the same time, as Jamie has noted, obviously, in this moment, we’re going to scrutinize even more aggressively than we always do, elements or lending.

my comments Citi’s results announced today, shows a very sluggish loan growth… banks are retreating from lending to preserve capital

My comments: The question by Morgan Stanley analyst and Jamie launched into rant, If you are interested you can read it in the above link. In short, the capital requirement going to 13%+ means buybacks are going to be very muted, the SCB (stress capital buffer) on the positive side, Fed is forcing these banks to have a fortress balance sheet that can withstand recession and Quantitative Tightening. This comment from Jamie sum’s it up all:

keep in mind, one thing, we’re earning 70% of tangible equity. We can continue doing that. The company is in great shape.

AOCI reserves In my citi notes, I have talked about mark-to-market is going to require drawdown or taking reserves for bond portfolio. So far JPM took $14B reserve and they are expecting that will come back to capital, that is reserve release (similar to last year) but over a period of 4 to 5 years. So that’s a straight drop to bottom line. If you normalize that at some point when rate raise stabilizes slowly that reserve will come back, that’s like $3 B per year benefit for another 3 to 4 years assuming rate raise is done by end of this year or 1H of next year. Give 3 Billion outstanding shares that is $1 EPS, or 10% higher EPS compared to the current year.

The banking system is strong, robust. The weakness is an opportunity to buy for next 3 to 4 years of outperformance.

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Credit
Credit is still quite healthy, and net charge-offs remain historically low. And there continue to be positive trends in loan growth across our businesses. In terms of actual credit performance this quarter, credit costs were $761 million

consumer Spend is still healthy with combined debit and credit spend up 15% year on year. The average consumer is spending 35% more year on year on gas and approximately 6% more on recurring bills and other nondiscretionary categories. Card outstandings were up 16%, and revolving balances were up 9%.

I’m not an expert on banks at all, but wouldn’t there be a lag in defaults on credit and also a lag in consumer spending as the higher rates kick in? If one thinks we’re going into recession, then it’s natural that the results wouldn’t show up until later.

Now, I’m not sure that says much about JPM though. Maybe it’s just part of the cyclical nature of the business.

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wouldn’t there be a lag in defaults on credit and also a lag in consumer spending as the higher rates kick in

Yes and Yes. So far, the credit is holding up good, consumer is still spending, not pulling back spending. Before the defaults, spending cuts will come in.

However, don’t read this separately, but read this, customer has higher balances (deposit/ checking/ savings) than pre-COVID, have record unemployment, for most the mortgage is locked in super low rates, and have experienced wage raise.

Banks have reserves. For Ex: citi reserves are 2.5% of outstanding loans. That’s a pretty high. Unlike in the past, this cycle banks are very healthy, have stronger balance sheet, better reserves, better profitability and FED is pushing them towards higher Capital ratios. For JPM and Citi by end of this year, or by 1Q next year they will have 13%.

In the meantime their NII (net interest income) is increasing. Both JPM and Citi are spending record amounts on automation, compliance related investments. Because of these elevated spending, you don’t see the NII gains falling to the bottom line. Banks are scaling back from their risky assets. When the cycle turns and Fed loosens the capital ratio’s, banks will have plenty of excess capital, the increased NII falling into the bottom line, and expenses start coming down. There will be a boom in profitability.

Of course that is in future and we need to get to that future.

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