Guest Post: JP Morgan Q1 2011 Earnings

Tyler Durden's picture

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.

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clones2's picture

What a horrible day for the markets today to go red from being up so much so early.  Keep an eye on the 50 DMA for the s&p.

Mark McGoldrick's picture

Does this mean the "Crash JP Morgue" effort was....   nothing?

Not exactly nothing, though. Right?  There is one thing we can learn from this:  Sprott and those on his payroll can launch an ETF like Obama can run a presidential campaign. 


AldousHuxley's picture


JPM is above other TBTF banks now. JPM replaced Goldman Sach as America's the premier franchise.


Connections to note:

  • Jamie Dimon came from Bank One which is HQ in CHICAGO....OBAMA's home turf.
  • Jamie Dimon is class A director at New York Fed
  • GE's Jeff Immelt is class B director at New York Fed
  • GE Building is at the heart of Rockefeller Center, and Rockefeller family runs operations out of Room 5600 on the 56th floor as well as the 54th floor.
  • The ROCKEFELLER family is known for its long association with and financial interest in the CHASE Manhattan Bank, now JP MORGAN CHASE.
  • University of CHICAGO was pretty much founded by John ROCKEFELLER
  • Milton Freedman and the concept of unregulated free markets as well as monetarism came from University of CHICAGO
  • John ROCKEFELLER's grandson, David ROCKEFELLER, was chairman of CHASE Manhattan
  • David ROCKEFELLER founded Trilateral Commission
  • David ROCKEFELLER is US founding member of Bilderberg Group
  • David ROCKEFELLER Studies Program is the primary "think tank" at the Council on Foreign Relations






Twindrives's picture

Criminal organization, just like the FED and the White House.

AldousHuxley's picture
  • JP MORGAN and Senator Nelson ALDRICH, drafted FEDeral Reserve Act on Jekyll Island
  • Nelson ALDRICH's daughter Abby ALDRICH ROCKFELLER married John ROCKEFELLER Jr. Their son is David ROCKEFELLER.
AldousHuxley's picture

History repeating 100 years later...

In 1912, the Pujo committee found that a cabal of financial leaders were abusing their public trust to consolidate control over many industries: the partners of J.P. Morgan & Co.  controlled aggregate resources of $22.245 billion...equivalent to the value of all the property in the states west of the Mississippi River

AldousHuxley's picture
  • One of the member of the ROCKEFELLER Trust Committee overseeing rockefeller family's wealth is Paul Volcker. 
  • Paul Volcker was VP at CHASE Manhattan Bank
  • Paul Volcker became New York Fed President before becoming Federal Reserve chairman
  • After leaving the Fed, Paul Volcker became chairman of J. ROTHSCHILD, Wolfensohn & Co.
ElvisDog's picture

Still, it must be a comfort to JPM and the other TBTF banks that they live in a heads-I-win (we profit we keep it), tails-you-lose (we lose money the taxpayer bails us out) world.

TruthInSunshine's picture

Mark-To-Market (true measures) would make 37% of all U.S. financial institutions insolvent overnight (i.e. unable to meet threshold capital reserve requirements), and put another estimated 22% in imminent jeopardy of insolvency.

Where would JP Morgan fit in this box? No doubt somewhat better, due to its insider status and ability a long time ago to put off toxic shit in front end bucket loaders full of bad paper into 33 Liberty for markups of around 1900% over fair value.

Careless Whisper's picture

why should i invest in JPM when i can buy best of breed? that would be WellsFargo/Wachovia who is the clear leader in laundering drug money. keeps them solvent. about $379 Billion between 2004 and 2007. I think they know what they're doing and so i'm with the leader.

Gubbmint Cheese's picture

fah-q this is frustrating.

RobotTrader's picture

SPY is now down 5 consecutive days on half the volume of the March decline.

I'm going to start laddering in to some more dividend stocks starting right now.

On my list:


AR15AU's picture

Your market timing approach epitomizes the dumb shit momo mentality of Fast Money... congrats.

Careless Whisper's picture

don't forget to have a stop-loss on that MSB robo.

jus_lite_reading's picture




hedgeless_horseman's picture

...the free market will have the final say on the future of the banking sector.

As if! 

Racer's picture

Free market?  Where? Where.....

Rainman's picture

Bank earnings mathematics remain unchanged. Begin with the desired result and wiggle your way backwards. King Kashflow be damned.

HROLLER's picture

JPM/Chase is making a killing off of Wamu's assets. The sad part of it all is that the shareholders of WMI are fighting WMI in order to receive compensation. WMI is trying to gift another $2 billion in tax refunds to JPM/Chase so the shareholders of WMI do not see anything. Right now the shareholders of WMI are fighting over approx. $10 billion in NOL's against the hedge funds who bought the debt for pennies on the dollar. The NOL's will be used in the reorganized company. The shareholders are in good hands with the EC and a valuation hearing is coming up in a little less than 2 months.

Eternal Student's picture

The big question with JPM is how did Blythe's group do? They've been shorting gold and silver like crazy, so simplistically I'd expect to see significant losses there. Realistically, they've probably managed to cover these up. And the key question is how they managed to do that. Anyone know?

55mph's picture


direction of asset prices?  where ever they need them to be.


mark to model accounting has changed everything.



antidisestablishmentarianismishness's picture

I guess that plot to drive them into bankruptcy ain't going so well.

eatthebanksters's picture

As the numbers of foreclosures rise, as the number of poorly conceived loan mods fail, and as the number of underwater homes rise faster (as a result of the coninuing decline in values), bank losses connected to houing will grow.  I don't have enough info to know if it will cripple the system, but I do know that the 'big shit' has yet to happen.

Bansters-in-my- feces's picture

So when you all gonna take back yer country...???


DavidPierre's picture
JP Morgan Earnings? Nothing Is But What Is Not...


My apologies to Shakespeare there...I have not done this type of analysis for quite some time for many reasons, largely time-related.  But this is the kind of "forensic accounting" that I truly enjoy.  The accounting standards used by public companies today have become a complete joke, and what standards remain go unenforced by the FASB/SEC/NASDAQ/FED etc.  When I saw JPM's earnings headlines this morning, my doubt about the "quality" of those earnings was triggered to the point at which I felt motivated to do a cursory examination of JPM's 8-K (preliminary 10-Q) filing.  I literally spent about 40 mins. just going thru the credit section located in the bowels of the 8-K, since this was the source of most of JPM's earnings boost.  I would like to qualify my work by saying that I would literally need all day to go thru this report plus the footnotes of the latest 10K in order to figure out exactly where JPM is exploiting the grey areas of FASB and pushing the envelope with accounting assumptions (like loan charge-off standards, deliquency period standards, interest rate assumptions, etc).  There is also a lot of information behind these numbers that would never be revealed to the public, so we have to make some assumptions about what is being manipulated on the "inside" books.  There is absolutely no doubt in my mind that there is serious manipulation of accounting standards and exploitation of the fact that these standards are rarely enforced, especially on a big, too-big-to-fail bank.

Why is this important and why does the whole earnings circus on Wall Street piss me off?  Because most investment money managers (big fund managers, etc),  financial advisors, stockbrokers and media morons look only at the headlines reported and assume that a company like JPM is telling the truth and they grab onto the headline information and spread it as gospel.  99% of all money managers and financial advisors, even the ones with fancy initials of accolade after their names, do not understand how to thoroughly dissect an SEC financial filing.  That skill is not required for them to be licensed to lose your money and take a lot fees in the process.  To be sure, some Wall Street analysts will go thru JPM's numbers like I just did and put together an analytic report that might highlight some red flags, but 99% of them will reiterate a "buy" recommendation and the portfolio managers, financial advisors and stockbrokers will grab onto those reports without reading them and justify loading up on JPM stock.  The whole circus is really a complete tragedy that will not end well in the long run.

So with that as a preface, let's jump into a "drive-by" look at what JPM reported and see if it makes sense and if the quality of earnings is solid or fraudulent.  Everything will be compared on a 1st quarter 2011 vs. 1st quarter 2010 basis.  Total revenues declined by 8.7%.  Not sure I would call that positive.  Net income, however, surged to $5.6 billion this quarter from $3.3 billion in 2010.  Well, when you are looking at a trillion dollar balance sheet, it only takes a small "adjustment" of bad loan assumptions to generate a couple billion in accounting income.  I am sure many of the assets JPM holds because they can't unload them - i.e. the toxic assets - were marked up in price to generate even more "paper income."  The disclosure on that latter source of "income" in the 8-K is very poor.   So how the hell did they report a huge jump in net income which was in excess of consensus expectations?

For purposes of this exercise I am just evaluating the credit statistics at a macro level.  My work is not precise but it's for sure within the bounds of "horseshoes and handgrenades."  To begin with, the "provision for credit losses" was $7 billion in Q1 2010 vs. only $1.2 billion this quarter.  Is this reasonable?  To be sure, if the 2010 number was large relative to the actual amount of losses experienced, it makes a lot of sense to reduce the provision recorded this year. "Provision" means an "estimate" of "potential" losses.  You can imagine that there's a lot of "wiggle" room in the assumptions made to calculate this "estimate," especially if Jamie Dimon leans heavily on his lieutenants to come up with some accounting earnings so they can beat the street and justify Dimon's HUGE bonus this year.  Let's just say that IF they had used a more reasonable 50% of the provision taken last year, it would have created a $3.5 billion accounting provision and that would have produced, roughly, only $3.3 billion of net income this year, which would have been a huge earnings miss.  I think it's safe to assume that if they "over reserved" for losses last year, they "under reserved" this year.  To be frank, if the Fed were not buying up toxic assets and if the Government were not guaranteeing a lot of bank assets, these provisions would much higher.  Especially given that we know for sure that deliquency and default rates on mortgages are still climbing.  Roughly 30% of JPM's assets are home-related loans (primary mortgages, home equity loans, home equity secured non-credit card loans, etc).  It's up to you to decide if JPM is being honest here, but I will unequivocally state that they did not take a high enough provision against credit losses by a couple multiples. 

Here's another interesting source of earnings management that I found.  They have mortgage repurchase liability on a lot of the mortgages they underwrote and then sold off to mortgage trusts.  That liability increased in 2011 to $3.3 billion from $2.3 billion last year.  This despite the mortgage foreclosure moratorium we have had.  That statistic alone justifies my statement in last sentence of the previous paragraph.  HOWEVER, despite an increase in this liability, the provision against this liability, i.e. the amount JPM has reserved for GAAP accounting purposes, was only $420 million vs. $1.4 billion last year.  That's a whopping $1.04 billion dollar swing in the expense line (lowering expenses by that much) and thus boosted net income by a little less than that, adjusting for taxes.  That number is about 26 cents of the 29 cents of earnings generated from lower write-offs referenced in the headline earnings summary (see any press release).   As you can see, it takes a very small change in bad-loan write-off assumptions to generate a big increase in GAAP-reported accounting earnings. 

One more little statistic that will never be reported in the press or analyzed by your financial advisor or retirement fund money manager is the percentage of non-performing loans as a percent of the total amount of outstanding loans plus deriviatives.  This is a HUGE area of earnings manipulation because it's data that gets buried in the bowels of financial filings and Wall Street analyst reports.  This number for JPM is absurdly low, as I'm sure it is for all banks.  But we know that JPM has an inordinate market share of entire derivatives market, and thus should probably be using higher assumptions for non-performing loans. Ha ha haaa.  For this year, JPM is reporting $15 billion in non-performing assets vs. total loans outstanding of $685 billion.  This would be 2% of total loans.  They are reporting a total balance sheet of $1.2 trillion, which includes loans plus derivatives.  So it's total reported non-performing loans represents only 1.3% of the entire balance sheet.

Does this make sense?  You tell me.  I find that number to be retarded, especially given the highly volatile nature of derivatives.  But let's say they are only light .5%.  Again, that is retarded.  But if they became only .5% less retarded and .5% more honest, that would create a $6 billion charge against earnings on a $1.2 trillion portfolio.  If this was their only mea culpa to the accounting gods - and none of the above mentioned areas of manipulation were adjusted toward the truth - they would have reported, roughly, a small loss for the quarter.  Imagine how big shareholders would howl in that case given the recently reported massive bonus Jamie Dimon awarded himself.  And believe me, I've been involved in quarter end games with trading desk assets in which we hid positions and had some positions marked way too high in order to increase the size of our bonus pool.  This was just on one small desk in the 1990's.  Imagine how large that fraud is across a big $1.2 trillion bank.

I could go on forever with this analysis but I would have to spend a week going thru JPM's public disclosures to ferret out some part of the golden truth.  Rest assured that what is disclosed publicly and can be put together with some forensic accounting is still based on "massaged fraud."  I would bet my last nickel that JPM is technically insolvent and that a very large percentage of its balance sheet is worth less than 50% on the dollar. 

Here is the link to the latest 8-K if anyone wants to peruse it for themselves Fraud-K  Since I don't get paid to do this work, I have to get back to doing what I do get paid for.  Ciao.   via...

Rainman's picture

Thank you for this learning moment on managed earnings. Again and again the bankster earnings accounting strategy becomes clearer and clearer... begin with the desired result and work your way backwards

NOPOMO's picture

I just increased my Q1 earning by %120.  Yes, that is right.....I stop paying my credit cards and now have some extra cash.