Submitted by MacroStory
JP Morgan Q1 2011 Earnings
On the headline JP Morgan (JPM) beat with $1.28 versus estimates of
$1.15 on EPS. Comparing Q1 2011 to Q1 2010 net revenues is down 8.8%
while EPS is up 72%.
Sounds OK unless you ask two very simple questions (1) what is the
direction of income before provisions for loan losses and (2) what is
the direction of asset prices.
Question 1 – What is the direction of income before
provisions. Comparing Q1 2011 versus Q1 2010, JPM income before
provisions for credit losses is down 20.1%. The chart below shows
revenue net of interest expense (blue line) which is declining, while
non interest expense (yellow line) is moving higher. The difference is
what remains to cover future loan losses.
Q1 2011 versus Q1 2010 shows sales declining 8.8% and net income
before provisions down an even larger 20.1%. Bottom line the bank’s
ability to absorb future losses is deteriorating.
Question 2 – What is the direction of asset prices.
Banks right now say it is improving and thus they are lowering reserves
for credit losses. In Q1 2010 JPM reserved 5.3% for future loan
losses. In Q1 2011 they have 4.3% reserved, a 19% reduction in
reserves rates. Housing data shows prices have begun a second leg down
though. Credit card delinquency rates continue to fall but for many
credit cards are the only remaining source of credit and thus will be
paid before a mortgage (buy groceries and gas on a credit card or make
your mortgage payment).
The chart below shows total loans and leases (blue line) which is
flat, reserves for credit losses (red line) which is falling and
provisions for loan losses (yellow line) which is almost non existent
now and in fact could go negative.
Time will only tell what the real
answer to question 2 is regarding the direction of asset prices. Right
now it appears the trend is lower. If in fact that is the case then the
deteriorating income of JPM and other banks will not be able to absorb
rising provisions for loan losses. The bank trade really comes down to a
bet on housing. So beyond FASB accounting tricks, government
intervention and regulatory slaps on the wrist, the free market will
have the final say on the future of the banking sector.