JPM Earings & Call Today

These are my takeaways.

JPM Q2 earnings were solid. Higher than Q1 across the board except for 400 MM add to reserves and a higher tax rate (20.4% vs 17.7 in Q1). Charge-off were actually slightly lower than Q1. In fact, except for lower Investment Banking and Mortgage fees, all of their other categories were near record levels. In fact expenses were quite contained given the inflationary environment.

CFO raised NII $2 BB (in spite of yield curve flattening), kept expenses flat, and indicated no near issues with credit. All flat too improved from previous update. ROTCE hit 17% earlier then planned.

Dimon was very animated on call. Only negative was deferral in shareholder buybacks. Seems related to 2 issues. Balance sheet market to market of $14 BB so far from rising rates. Will come back to equity $3 BB per year if rates stay flat. New risk rates for balance sheet items. Primarily mortgages. New requirement for mortgages unreasonable to Dimon. Plans to sell most of the mortgages to reduce issue. Indicated this new rule is terrible for America. No big deal for JPM. Characterized the stress test as not representative of what would happen in a real stress situation. Dimon indicated JPM runs thousands of stress test a week far more sophisticated than FEDS. FED stress test indicated $40 BB of losses. Dimon says it will never happen even under their scenario. Proof is 2008 - 2010. Dimon claims under their stress scenario JMP would still be profitable.

CFO demonstrated that capital levels will replenish very quickly via retained earnings.

CFO asked on call if any creep in credit deterioration, he said would have to look close and maybe? in lower income group? Maybe? Could simply be return to normalization.

Loan growth YTD up 6% deposit growth up 7%.

Dimon discussed hypothetical impacts of severe credit scenarios. He did not predict one. Media only focussed on negative scenarios comments. They never reviewed the financials. Which were solid. Credit continues to perform at remarkably low levels.

Pre-tax pre-provision was within $1 BB of all time highest quarter in Q2 2021.

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Exactly

Press hyped the headlines. Just repeated analyst day warnings. Nothing tangible today. Moreover, capital requirements self-inflicted by DC bureaucrats. Too much time in faculty lounge.

Just a repeat of POTENTIAL caution about the future given the unknown-unknowns. QT, et al…

“The JPMorgan earnings report wasn’t nearly as bad as it was made out to be in the press. The company did miss on EPS, but largely because of non-operating/one-time items. The NII/NIM exceeded forecasts (and mgmt. raised guidance for NII) while expenses were well controlled, and credit was about inline (the reserve build was tiny). Mortgage and investment banking fees were soft, as everyone anticipated. The media seemed to tie the buyback suspension to a poor Q2 print and/or a darker view of the economic outlook, but that’s not really true – the buyback suspension was purely a function of more stringent capital requirements and didn’t come as a huge shock (the company warned investors at the recent analyst meeting that repurchase activity would need to be curtailed for a period of time to replenish capital).”

These are my takeaways…

I am not in a position to say anything much about how accurate everything in that is.
They’re pretty astute managers, so I expect it’s probably a good take on things and their expectations are sane.

But does anyone else get this creeping feeling reading that summary?
It sounds so much like the “we have to keep dancing” just-before-a-bad-thing speech you tend to hear at top of cycle.

As I say, I’m not saying anything is wrong or that anything bad is about to happen.
But it sounds like the Panglossian sort of thing you’d quote in a book written after a crash to demonstrate the hubris of bosses.

Jim

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“to demonstrate the hubris of bosses.”

In a recent interview jamie said “you won’t hear the word humble and Jamie Dimon in the same sentence”

I like that in a leader.

he has balls.

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I sold JPM at roughly the same price of now in Oct 2020. At the time, I was worried about the billions of dollar of loan loss reserve they just increased due to covid. Shortly after, it turns out not a big deal with the govt sending out checks, and they released all those reserves back and earnings are great again and stock bounced back.

Same thing happening again. The earning looks bad due to the extra loss reserve. They haven’t lost that money yet. If there’s no recession, they get that money back.

However, I think it’s true JPM is behind in technology investments. I heard they are processing so many trades and has so many legacy systems, they spend huge time to fix problems whenever something breaks. They probably will have to spend more money to hire more people to upgrade their technology/automations stuffs.

In a recent interview jamie said “you won’t hear the word humble and Jamie Dimon in the same sentence”
…
I like that in a leader.

I like it in a leader when he’s right about something.
I have no reason to doubt that he’s right about this, but still…
I get that tingly feeling of impending doom whenever I hear a ship being called unsinkable : )

Jim

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I get that tingly feeling of impending doom whenever I hear a ship being called unsinkable : )

For those of you who didn’t notice:
J.P.Morgan (the person - not the company) was the owner of the “unsinkable” Titanic https://en.wikipedia.org/wiki/Titanic

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J.P.Morgan (the person - not the company) was the owner of the “unsinkable” Titanic

Nice! I would love to claim I knew that, but I didn’t.

Jim
(though I’m from a family of Cunard fans–I measure my whisky in a jigger bought on board, and decorated with, the SS Doric)

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I like that in a leader.

mmm…reminded me of something I once heard by way of Hollywood.

”I like that in a pilot”

A silly metaphor for sure but Jaime sometimes reminds me of Maverick. Would you rather have a measured, calm, and more thoughtful Iceman directing an earnings call, or a touch of impulsive hubris, animation, and brash arrogance? Yeah ok, I can see how that would turn out 30 years later. Who is now the desk jockey wearing the stars? But who is still rallying the team flying Mach + with his hair on fire?

https://youtu.be/gf_KrKxw0sw

mmm…reminded me of something I once heard by way of Hollywood.

”I like that in a pilot”

precisely

top gun maverick is a great flick

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I like that in a leader, she has “____”. I wonder what the right equivalent would be?

I wonder what the right equivalent would be?

Maybe look to music for inspiration—

Boots made for walkin’?
Standing on her own two feet / And ringing on her own bells?

Jim

My post on JPM earnings, just posted,

https://discussion.fool.com/jpm-conf-call-notes-35142968.aspx

New requirement for mortgages unreasonable to Dimon.

Expanding on this a bit, the mortgages carried on the books requiring higher capital from the SCB (Stress capital buffer). Probably the stress model has learned some lessons (cat that sat on a hot stove) from GFC, and requires higher capital buffer for mortgages. Historically house prices were not expected to go down severely and GFC and the excess before that basically proved that assumption and the models built on the assumptions useless. Now Fed bakes in higher capital for mortgages. Jamie also talked about how Europe requires for lessor capital compared to US.

It is not just JPM, Citi actually identified this as an issue, and started walking away from mortgage, auto, and student loans as strategic shift, as the capital required for them are higher. WFC has walked away from mortgage much earlier, they are not lending anything less than super prime or 750+ FICO and even there they have an asset cap, so pretty much securitize and sell it. Essentially only warehouse facility they have and not carrying much mortgage on their books.

FED stress test indicated $40 BB of losses. Dimon says it will never happen even under their scenario

We don’t know what are the assumptions that went into FED’s scenario’s but clearly QT is in FED’s scenario and most bank CEO’s are harping on that, QT is something that FED can manage and we don’t know how exactly it is going to play out, there is no play book, and FED’s assumptions on this scenarios are onerous. On the other hand bond market is witnessing extreme volatility (historically high volatility). We could be seeing some liquidity events, and liquidity driven blow outs of hedge funds, forced sale etc. It may be difficult for individual investor to take advantage, but it is something I expect fully. Especially banks stock can go through sharp sale and recover quickly (because Fed will then react and come to rescue).

Dimon was very animated on call.

I haven’t listened to the call, only read the transcripts. I think except Mike Mayo, he was fierce in his response throughout Q&A and bit critical of FED. May be there is some theatrics, posturing involved there to force FED to loosen some of the capital standards.

But the bottom line is the CET1 is going to 13%, and JPM has to retain earnings, to build the capital. Now the question is, are there going to be any scenario where the banks have to either cut dividend or raise capital (if they don’t want to cut the dividend). I hope not.

I think Buying bank stocks now will set investors for the next 3 to 4 years of robust growth in profitability. For ex AOCI reserves will get released as rates stabilized over the next 3 to 4 years will be straight drop to bottom line and can contribute $3 B or $1 to EPS; higher NII, at some point technology investments, expenses will moderate further adding to the earnings. At some point in the next 3 to 4 years, JPM can hit a steady run rate of $15 EPS at 10 PE that will translate into $150, and share buybacks will come back second half of next year, further pushing the EPS. I am in no hurry, I have sold some $75 Jan 23 Puts. Either I collect the premium (which is a bad outcome) or get those shares assigned.

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It sounds so much like the “we have to keep dancing” just-before-a-bad-thing speech you tend to hear at top of cycle.

You want to read what you want. Plain and simple. When one has decade long view of US banks are poor institutions that burn capital, don’t earn enough on the assets, etc, and repeatedly called Bank of America is poster child of sh!tty us banks, and yet WEB in his considerable stupidity choose to own 10% of that bank, one has to ask, is there some bias? is objectivity is bit lacking, perhaps?

No I didn’t read Jamie’s comment as duplicity. Jamie is clear, JPM bank has strong balance sheet, our customers credit are strong, our credit charge-off’s are low (for citi bank it is historical I mean all time low), we have significantly reduced Risky assets (where typically banks earn higher income and they come with higher losses on down cycle) and continuing to reduce risky assets, we have experienced 15% unemployment suddenly during COVID and we were fine, (my comments) now record low unemployment and stress scenario assumes 10% unemployment and we are not going to get their suddenly like COVID, but even if our unemployment is going to be higher due to recession we are going to get their gradually, and the banks will be earning during the period, to offset any losses.

So CEO’s don’t like Fed’s SCB and G-SIB reserve requirement pushing them towards 13% CET1, requiring capital build up, instead of using that capital to buyback shares or lend more. Banks are reducing credit, when the interest rates are going up, they are forced not to make loans. What is the point of a bank if it is not going to lend?

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I like that in a leader, she has “____”. I wonder what the right equivalent would be?

How about chutzpah?

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