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Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results

Reggie Middleton's picture




 

My reveiw and opinion of JP Morgan's Q4 2009 is ready for download JPM 4Q09 review JPM 4Q09 review 2010-01-19 01:48:27 1.16 Mb.
I have made it available to all readers, but I sugguest that paying
subscribers follow the appropriate links to see how appropo the
assumptions regarding revenue and loss trends were in the forensic
analysis. I have excerpted some of the review below:

Right off the bat, let's get something straight. The tax rate for JPM in
4Q09 was impacted by one-time items and some tax deductions. The tax rate was
15.4% against the normalized tax rate of 35%. Thus, JPM saved nearly $758
million (25.7% of the net income available to common stockholders) or $0.19 per
common share in 4Q09 owing to lower tax rate.
So when you see headlines in the media
touting, "
JPMorgan Earnings Blow Past Expectations, Revenue Looks Light
...
", "JPMorgan Earnings May Have
Tripled on Investment-Banking Fees
‎", and "J.P. Morgan Earnings: A Beat! - MarketBeat - WSJ", view
them with a jaundiced eye.

When the markets rejoiced the strong revenues of investment banks in 3Q09
on the back of extraordinary trading revenues, Boombustblog anticipated well in
advance the highly fluctuating nature of this source of income and raised
concerns about its sustainability (subscribers, see "The
JP Morgan Full Forensic Report is ready for download!
", non-subscribers
should reference Reggie
Middleton on JP Morgan's Q309 results)
. If anything, I was "TOO" optimistic
in my assumptions and forecasts regarding revenue drivers and loss rates. JPM's
4Q09 results have reinforced Boombustblog's apprehensions that the trading
revenues which soared high in 3Q09 on the back of increased volumes and record
high spreads would normalize and suffer sharp compression in the coming
quarters.
The
revenues from principal transactions which largely comprise trading income as
well as gains and losses on fair valuation of investments fell to just $0.8
billion in 4Q09 from $3.8 billion in 3Q09.
The obvious reason was the drop
in volumes and tightening of spreads, which I clearly warned my subscribers
about last year
. Revenues
from principal transactions accounted for just 3.6% of the total net revenues
against 14.5%, the previous quarter
.

jpm_ficc1.png

 

Credit
conditions continue to remain tough as the delinquency rates continue to climb
and NPAs remain at elevated levels. The 30 day+ delinquency rates for the
consumer lending rose to 5.93% in 4Q09 from 5.85% in 3Q09 and 4.21% in 4Q08. The
30 days+ delinquency rates for credit card touched 6.28% in 4Q09 against 5.99%
in 3Q09 and 4.97% in 4Q08.

cons_credit_losses.png

Non
performing loans increased to 2.77% of total loans at the end of 4Q09 from 2.72%
of total loans at the end of 2Q09.

 loan_losses.png

 Loan
portfolio continues to shrink and net interest margin continues to contract.

 image012_-_mbs.png

image001_mbs_sales1.png

 

As clearly foretold last year, JP Morgan is significantly
understating the potential for losses on its WaMu portfolio acquisition

We
looked into acquired portfolio of Wamu and as analyzed in the forensic report,
owing to continuous deterioration in the credit quality, the acquisition is
proving to be a bad deal for JPM. Exactly one year ago, I accused JP Morgan of
taking unrealistic marks on the WaMu portfolio, see
Is
JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!.

It appears as if I was right on the mark, despite management proclaiming that
the loss trend on those loans are going as expected. If that was the case, why
is the discount and loss buffer already eaten through to provide material net losses
- just one year after the purchase??? The
Alt-A/Option ARM/HELOC pain has yet to really hit, and JPM is already in the red by
about 5% on this deal and they bought it at a 25% discount! I suggest all
readers reference the loss trends in the Alt-A market as of December (
A
Fundamantal Investor's Peek into the Alt-A Market
) and paying subscribers should download the worksheet behind the data
to get a granular view of what is going on. We are already at a charge-off rate
of near 30%, which will not be reflected in JPM's numbers until next quarter,
and I have reason to believe that the WaMu loans will perform worse than
average.

As
per the last forensic report at the end of 2Q09, the implied discount rate for
purchased credit impaired loans stood at 22.9% while delinquency rate was
23.4%, thus a negative buffer of 0.5%. In 3Q09, this negative buffer has
further worsened to 2.6%, due to an increase in delinquency rate to 25.6%
reflecting continuous deterioration in the acquired portfolio. Moreover, for
4Q09 the delinquency rate has increased further to 27.8% and though the company
has not reported the outstanding balance and carrying value numbers we believe
that the buffer for 4Q09 will decline further.

image002-wamu_loans.png

image001-wamu_disc.png

In
light of expected loan losses from the acquired portfolio, JPM is adding to the
allowance for loan losses. In 4Q09, JPM added nearly $491 million to allowance
for loan losses to cover the estimated deterioration in the Washington Mutual
purchased credit-impaired portfolio; this is compared with no addition in the
same quarter last year and nearly $1.1 billion addition in 3Q09.

 

Warranties of representation, and forced repurchase of
loans

JP Morgan has increased its reserves with regards
to repurchase of sold securities but the information surround these actions are very
limited as the company does not separately report the repurchase reserves
created to meet contingencies. However, the Company's income from mortgage
servicing was severely impacted by increase in repurchase reserves. Mortgage
production revenue was negative $192 million against negative $70 million in
3Q09 and positive $62 million in 4Q08.

Counterparties
who are accruing losses from bad loans, (ex. monoline insurers such as Ambac
and MBIA, see
A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing
loans that appear to breach certain warranties or smack of fraud. I expect this
activity to pick up significantly, and those banks that made significant use of
brokers and third parties to place mortgages will be at material risk - much more
so than the primarily direct writers. I'll give you two guesses at which two
banks are suspect. If you need a hint, take a look at who is increasing reserves
for repurchases! JP Morgan and their not so profitable acquisition, WaMu! 

http://boombustblog.com/images/stories/regional_banks/32bustedbanks/thumbnails/thumb_image020.png

As I said, losses should be ramping up on the mortgage sector. Notice the
trend of housing prices after the onset of government bubble blowing: If
Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

PNC Bank and Wells Fargo are in very
similar situations regarding acquiring stinky loan portfolios. I suggest subscribers
review the latest forensic reports on each company to refresh as the companies
report Q4 2009 earnings. Unlike JPM, these banks do not have the investment
banking and trading fees of significance (albeit decreasing significance) to
fall back on as a cushion to consumer and mortgage credit losses.

I am looking for strategic partnerships. Any who may be interested should feel free to reach me by voice or email.  

Related reading from the Blog:

A
Fundamantal Investor's Peek into the Alt-A Market

(Reggie Middleton's Boom Bust Blog/MyBlog)

... Other banks to look at with suspect
portfolios: JP Morgan Chase (Free Preview)  JPM
Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb
 JPM ...

Thursday, 14 January 2010

 

1. Reggie
Middleton on JP Morgan's Q309 results

(Reggie Middleton's Boom Bust Blog/MyBlog)

...an. msnbc.com - The market's expectations
for bank earnings increased after
JPMorgan set a high bar Wednesday
with a surprisingly strong profit that helped propel the Dow .....

Friday, 16 October 2009


2.
Why
Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in
the US?

(Reggie Middleton's Boom Bust Blog/MyBlog)

JPM derivative and off balance sheet lending commitments and guarantees
exposure Warning!!! This is the type of investigative, unbiased and independent
analysis that you will never find in the mai

Thursday, 03 September 2009

3. If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt
2 - JP Morgan

(Reggie Middleton's Boom Bust Blog/MyBlog)

...and scroll down to the second half. JP
Morgan securitization activities and QSPE exposure JPMorgan
securitizes and sells a variety of loans, including residential mortgage,
credit card, a...

Tuesday, 13 October 2009

4. The
JP Morgan Full Forensic Report is ready for download!

(Reggie Middleton's Boom Bust Blog/MyBlog)

... Must Read: An Independent Look into JP
Morgan. This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis Subscription
2009-09-18 00:56:22 488.64 Kb), which is fre...

Thursday, 24 September 2000

An
Independent Look into JP Morgan

(Reggie Middleton's Boom Bust Blog/MyBlog)

...plenty of this in the public preview.
When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that
the quality of JPM's derivative exposur...

Friday, 18 September 2009

Re:
JP Morgan, when I say insolvent, I really mean insolvent

(Reggie Middleton's Boom Bust Blog/MyBlog)

...nbsp;  I have said it before, and
I'll say it again - JP Morgan is insolvent! Anybody from JPM
who wants to correct can simply email me via the contact form at the top of my
site to show m...

Thursday, 22 January 2009

3. If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt
2 - JP Morgan

(Reggie Middleton's Boom Bust Blog/MyBlog)

...and scroll down to the second half. JP
Morgan securitization activities and QSPE exposure JPMorgan
securitizes and sells a variety of loans, including residential mortgage,
credit card, a...

Tuesday, 13 October 2009

4. Is
JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful!

(Reggie Middleton's Boom Bust Blog/MyBlog)

...ead of "Investment Advice in the
MainStream Media: Hedge against Success???" For those don't know, the JPM discussion started due to this insolvency post: Re:
JP Morgan, when I say insolvent, I really...

Friday, 06 February 2009

5. Yeah,
Countrywide is pretty bad, but it ain't the only one at the subprime party...
Comparing Countryw

(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

Saturday, 08 September 2007

6. Anecdotal
observations from the JP Morgan Q2-09 conference call

(Reggie Middleton's Boom Bust Blog/MyBlog)

...ve trading arms to hide their negative
earnings under??? Now, on to the review of credit issues in the JPM conference call...    Leveraged loans
marked 42 cents on the dollar "Fir...

Friday, 17 July 2009

 

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Tue, 01/19/2010 - 13:33 | 198358 Gimp
Gimp's picture

Thanks Deadhead good points on FAZ

Tue, 01/19/2010 - 12:49 | 198309 deadhead
deadhead's picture

Reggie....nice job and thank you for sharing.

i've seen only one article on the forced buyback of mortgages (about 2 months ago in the wsj) and as you pointed out, this is one to keep an eye on that will never be reported in the financial MSM.

Dimon was not very optimistic on his outlook for the economy either as I am sure you are aware from the conf call notes.

thanks again!

p.s. did ya like Dimon's comment re "overcapitalized"??  that was a gasser indeed!  James is a pretty funny guy.....

 

Tue, 01/19/2010 - 12:36 | 198290 Gimp
Gimp's picture

Excellent piece Reggie but FAZ keeps going down and the bank equities keep going up even though most of them are really insolvent??  The markets are always right theory seems to be out the window.

Tue, 01/19/2010 - 12:47 | 198306 deadhead
deadhead's picture

take a look at the components of FAZ via FAS on the direxion website, it is not all banks.  typically, banks have pushed the flow of faz/fas, but the sector rotation game is keeping faz down, i.e. banks up, reits down, etcetera. 

Tue, 01/19/2010 - 12:25 | 198282 Yardfarmer
Yardfarmer's picture

Excellent and exhaustive over the horizon radar analysis of the incoming missiles. My question is: what does JPM massive OTC derivative exposure have to do with this?

Tue, 01/19/2010 - 08:09 | 198108 Anonymous
Anonymous's picture

Way to go....good stuff....

So basically the one time investment surge.....free money
to loan....and fake accounting....

And add the prospect of higher rates....and their affects....

Cannot add up up in terms of higher future stock prices....

Leaving only...dumb money to bid up prices in the near term....

.......................................

Unforeseens ....ie favorable overall govt. tax structure change could change the picture.....but the odds of favorable unforeseens are basically nil....

The unforseens seem to be the negatives....as the US borrowing needs are higher than the total savings produced world wide....

Anything else ?

Thus are you saying to SHORT the financials now ?

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