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Reggie Middleton on JP Morgan's Q309 results

Reggie Middleton's picture




 

I, Reggie Middleton, challenge the mainstream media to think
independently. I challenge them to dig down, past the sterilized,
politically correct soundbites proffered by popular corporate
management, you know - the "in crowd". I challenge the MSM to pull out
a calculator, run through the reported numbers, and actually ascertain
if what is being proferred by managment actually correlates with the
numbers offered to the regulatory agencies. I know some of the finance
stuff can get arcane, but their are many objective parties to turn to
for assistance. Unfortunately, they are very rarely consulted. I see
the favored names in the media, but rarely do I see objective opinion. 

Below is a snippet of headlines that I pulled from a Google news search for the phrase JP Morgan.

Keep these newsbites in mind as I go over what I gathered from JP Morgan's latest results.


JP Morgan - 3Q09 Results and Outlook

Our
modelled results were pretty much on point with JP Morgan's actual Q309
reported results - see

The tough economic environment is still gripping the
traditional banking operations of US banks and JP Morgan's 3Q09 fail to provide
light at the end of the tunnel. As a matter of fact, if is arguable that for
those that do perceive a light, it is that of a freight train coming to run
over the observer. The credit deterioration impact on JP Morgan, however, has
been moderated by the gains from trading revenues which provided more than
adequate cushion to absorb the high credit losses from the traditional banking
operations.

The
major support for JP Morgan came from increase in revenues from principal
transactions (including trading revenues of investment banking and
corporate/private equity division) which led non-interest revenue to increase to
$13.8 billion in 3Q09 from $12.9 billion in 2Q09 and $5.7 billion in 3Q08. In
3Q09, non interest revenues accounted for 52.2% of the total net revenues
against 50.6% in 2Q09 and 39.0% in 3Q08. 

jpm1.png


Revenues
from principal transactions increased to $3.8 billion in 3Q09 from $3.1 billion
in 2Q09 and negative $2.7 billion in 3Q08. The revenues from principal
transactions of investment banking increased to $2.7 billion in 3Q09 from $1.8
billion in 2Q09 and negative $922 million in 3Q08 while the revenues from
principal transactions of corporate/private equity division was $1.1 billion in
3Q09 against $1.2 billion in 2Q09 and negative $1.9 billion in 3Q08. The year-on-year
change in trading revenues in the investment banking division was primarily
owing to gains in the fixed income investments including legacy leveraged loans
and mortgage related positions of $400 million against mark downs of $3.6
billion in 3Q08. However, the high trading revenue comes at a cost of high
market risk which is reflected in higher VaR levels. The fixed income VaR has
increased substantially and stood at $243 million at the end of 3Q09 against $183
million at the end of 3Q08.

jpm2.png

Net
interest income increased marginally to $12.7 billion from $12.6 billion in
2Q09 and $9.0 billion in 3Q08 primarily on account of improvement in net
interest margin. The net interest margin increased to 3.40% in 3Q09 from 3.37%
in 2Q09 and 3.06% in 3Q08 as decline in average rates on interest bearing
liabilities exceed the decline in yield on interest earning assets.

jpm3.png

However,
the tough credit environment and cautious lending is leading to a shrinking
loan portfolio which is leading shrinking interest earning assets. JP MORGAN's
total loan portfolio contracted 14.2% (y-o-y) and 4.0% (q-o-q) in 3Q09. In
essence, the most esteemed of the commercial banks is actually shrinking its
commercial banking activities as its investment banking and trading activities
skyrocket. Most lay persons may not realize that this is not your toaster for a
savings account institution anymore. In addition, the significantly greater
risks born from rampant trading activities fall directly upon an already
insolvent FDIC (see
"I'm
going to try not to say I told you so..."
.) and in addition apparently
significantly disadvantages those smaller banks that failed to take the outsized
risks of their larger, Wall Street connected brethren, see "Big
Bank (and the Treasury) vs. Little Bank: Whose risking your tax dollars?
".

image004.gif

Credit
conditions continue to deteriorate as the delinquency rates continue to climb
and the non-performing assets continue to surge. The housing crisis continues
to play out in the form of spiralling delinquency rates with the 30 day+
delinquency rates for the consumer lending rising to 5.85% in 3Q09 from 5.22%
in 2Q09 and 3.16% in 3Q08. The implications of the rising unemployment are
reflected in the rising 30 days+ delinquency rates for credit card which
touched 5.99% in 3Q09 against 5.86% in 2Q09 and 3.91% in 3Q08. The acquired
WaMu portfolio is deteriorating much more rapidly. The 30 days+ delinquency
rates for WaMu's credit card portfolio reached 12.44% in 3Q09 against 11.98% in
2Q09 and 7.53% in 3Q08. The delinquency rate for acquired credit-impaired loans
from WaMu transaction was 25.56% in 3Q09 against 23.37% in 2Q09 and 13.21% in
3Q08. These are literally outrageous rates of capital destruction!

image005.gif

Non
performing loans increased to $17.7 billion (2.72% of total loans) at the end
of 3Q09 from $14.7 billion (2.17% of total loans) at the end of 2Q09 and $6.9
billion (0.91% of total loans) at the end of 3Q08. Total non-performing assets
increased to $20.4 billion (3.12% of total loans) from $17.5 billion (2.57% of
total loans) at the end of 2Q09 and $9.5 billion (1.25% of total loans) at the
end of 3Q08.

jpm4.png

image007.gif

As
a result of high delinquencies and NPA levels, loan losses continue to remain
at high levels and show no signs of easing. The gross charge offs increased to
$6.6 billion (annualized charge off rate - 4.1%) in 3Q09 from $6.3 billion (annualized
charge off rate - 3.7%) in 2Q09 and $2.7 billion (annualized charge off rate -
1.4%) in 3Q08 while the provisions for loan losses were $8.0 billion in 3Q09 (annualized
rate - 4.9%) against $7.9 billion (annualized rate - 4.7%) in 2Q09 and $5.7
billion (annualized rate - 3.0%) in 3Q08.

image008.gif

Non
interest expense was $13.4 billion against $13.5 billion in 2Q09 and $11.1
billion in 3Q08. The increase in trading revenues trickled down to the bottom
line resulting in net income increasing to $3.5 billion in 3Q09 from net income
of $2.7 billion in 2Q09 and a loss of $54 million in 3Q08. Diluted EPS in 3Q09
was $0.82 per share against $0.28 per share in 2Q09 and $0.11 in 3Q08.
Excluding these revenues, the JP MORGAN's operations portray a very dismal
performance - reflecting shrinking loan base, rising loan losses and declining
asset yields with minimum probability for net interest margin increase in
short-to-medium term (off Fed's near zero rate interest policy).

jpm5.png 

 Relevant links of interest:

For those who want to hear alternative, non-MSM love fest
discussion of Jamie Dimon, JP Morgan and their proximity to Geithner
and the Fed, see this clip from Bill Moyers.
If any of you know Jamie Dimon personally, you should fast forward to
6:25 into the video, where it appears as if he seems to have actually
threatened a Congressmember. She didn't appear too intimidated,
though.   

 Next up - Wells Fargo!

 

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Fri, 10/16/2009 - 22:02 | 101592 Mountaineer
Mountaineer's picture

The collapsing VaR on their equity trading is interesting...

Fri, 10/16/2009 - 20:42 | 101517 DaddyWarbucks
DaddyWarbucks's picture

"The credit deterioration impact on JP Morgan, however, has been moderated by the gains from trading revenues which provided more than adequate cushion to absorb the high credit losses from the traditional banking operations."

Wait a minute. Did I just hear what I think I heard? In my simple mind that explains some of this insane market activity.

Fri, 10/16/2009 - 20:15 | 101500 Anonymous
Anonymous's picture

hey reggie

when is this market going to collapse????

Fri, 10/16/2009 - 19:08 | 101435 Anonymous
Anonymous's picture

Yup, at best from this analysis one should note most critical aspects are no better than 1Q 2009; great work. But I am afraid the debate on FASB 166 and 167 would once again show the spineless nature of the O team and the collusion of the congress, both of whom would work to let the banks have their way. An the piece on BoA aka AIG-2 (maybe AIG-squared) was great work too!

Fri, 10/16/2009 - 17:15 | 101310 Bit Bucket
Bit Bucket's picture

Reggie

Thanks so much for the BAC article. I read it yesterday afternoon and dumped by BAC and bought 100 OCT 18 puts.

You rule! Thanks for publishing your research.

John

Fri, 10/16/2009 - 18:14 | 101381 Reggie Middleton
Reggie Middleton's picture

You're welcome!

Please keep in mind that I do not offer investment or trading advice of any type. I am simply sharing public portions of my research and opinion. I hate to be such a formal ass, but I don't want anyone to get the wrong impression.

Fri, 10/16/2009 - 21:09 | 101536 Bit Bucket
Bit Bucket's picture

Reggie

Understood, but there is not a court in the land that would confuse me with an uninformed investor. And, if I had to guess, there are few uninformed investors frequenting this site. They sorta stick out like sore thumbs.

Again thanks and keep up the good work.

John

 

 

Fri, 10/16/2009 - 20:45 | 101520 DaddyWarbucks
DaddyWarbucks's picture

Thanks for all your work. We're grown ups here, we want the truth even if it's complicated and unpleasant.

Fri, 10/16/2009 - 16:14 | 101213 deadhead
deadhead's picture

thanks Reggie.  I'm looking forward to your take on wfc. 

watch the FASB 166, 167 playout...it's heating up big time.

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