There’s Something Fishy at the House of Morgan

I invite all to peruse the mainstream financial media and sell side
Wall Street’s take on JP Morgan’s Q1 earnings before reading through my
take. Pray thee tell me, why is there such a distinct difference? Below
are excerpts from the our review of JP Morgan’s Q1 results, available to
paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.

Here we go…

There’s Something Fishy at the House of Morgan

JPMorgan’s Q1 net revenue declined
9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5%
y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13%
y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net
revenues, noninterest expenses were flat at $16bn. Non-interest expenses
as proportion of revenues went was 63% in Q1 2011 compared with 58% a
year ago and 61% in Q4 2010. However, due to substantial decline in
provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to
$1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test
(an efficacy of ability to absorb credit losses) coupled with higher
expected wave of foreclosures which is masked by lengthening foreclosure
period and overhang of shadow inventory, advocate a cautionary outlook
for banking and financial institutions. As a result of consecutive
under-provisioning since the start of 2010, JP Morgan’s Eyles test have
turned negative and is the worst since at least the last 17 quarters.
The estimated loan losses after exhausting entire loan loss reserves
could still eat upto 8% of tangible equity.

Non-interest revenues

Non-interest revenue declined 5% y-o-y (down 5% q-o-q) to $13.3bn
from $14.0bn in the previous year. Investment banking fees were up 23%
y-o-y as debt underwriting fees and advisory fees were up 29% y-o-y and
44% y-o-y, respectively partially offset by 8% decline in equity
underwriting fees. Principal transactions revenues were up 4% y-o-y to
$4.8bn, the highest at least since last 17 quarters. Asset management
revenues were up 10% y-o-y $3.6bn. The bank reported a loss of $0.5bn on
mortgage fees and related income compared with gain of 0.7bn in the
corresponding quarter last year while securities gains for Q1 2011
declined to $102m from $610m in Q1 2010. Credit card income was up 6%
y-o-y to $1.4bm while other income increased 40% y-o-y to $574m.

I have warned of this event. JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP
Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last
Year & Is Still Severely Under Reserved By Over $4 Billion!!!
Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011.

Traditional banking revenues: manifest destiny as forwarned – Weakening Revenue Streams in US Banks Will Make Them More Susceptible To Contingent Risks

Net interest income declined 13% y-o-y (-2% q-o-q) to $11.9bn versus
$13.7bn in the previous year as interest income fell 7% to $15.6bn while
at the same time interest expenses increased 19%. Interest income
declined as a result of steep decline in yield on interest bearing
assets despite a 2% y-o-y and 4% sequentially increase in interest
bearing assets. Low interest rates and lower proportion of high yield
assets have caused a strain on yield on interest bearing assets. The
proportion of loans to interest bearing assets (high yield assets) have
declined to 34% in Q1 2011 from 36% in Q1 2O10 and 39% in Q1 2O09 while
at the same time proportion of Feb Funds rate (low yield assets) to
interest bearing assets have increased.  Yield on interest bearing
assets which is in a downward trajectory declined to 3.06% in Q1 2011
versus 3.35% in Q1 2010.

Interest expense increased to 19% as interest bearing liabilities
increased 2% y-o-y while at the same time yield on interest bearing
liabilities increased to 0.81% from 0.69%. Overall, the bank’s net
interest margin declined to 3.1% in Q1 2011, the lowest since 2007 as
low interest rate environment coupled with low risk appetite have taken a
toll on banks net interest margin.

Again, I have warned of this occurrence as well. See my interview
with Max Keiser where I explained how the Fed’s ZIRP policy is literally
starving the banks it was designed to save. Go to 12:18 in the video
and listen to what was a highly contrarian perspective last year, but
proven fact this year!

Provisions and charge-offs: I have been warning about the
over-exuberant release of provisions to pad accounting earnings since
late 2009!

Declines in provision was one of the major contributors to bottom
line. JPMorgan reduced its provision for loan losses to $1.2bn (0.7% of
loans) in Q1 2011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn
(1.8% of loans) in Q4 2010 while charge-offs declined to $3.7bn (2.2%
of loans) in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from
$5.1bn (2.9% of loans) in Q4 2010. Although banks delinquency and
charge-off rate has declined, the extent of decline in provisions is
unwarranted compared to decline in charge-off rates. As a result of
higher decline in provisions compared to charge-offs, total reserve for
loan losses have decreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7%
in Q4 2010. At the end of Q1 the banks allowances to loan losses is
lowest since 2009.

Although the reduction in provisions has helped the banks to improve
its profitability it has seriously undermined the banks’ ability to
absorb losses, if economic conditions worsen. As a result of under
provisioning for the past five quarters, the banks Eyles test, a measure
of banks’ ability to absorb losses, has turned to a negative 7.7% in Q1
2011 compared with +6.4% in Q1 2010. A negative Eyles test has serious
implications to shareholders – the losses from banks could not only
drain entire allowances for loan losses which are inadequate but can
also wipe off c7.7% of shareholder’s equity capital. The negative value
of 7.7% for JPM’s Eyles is the lowest in this downturn.

For those of you who believe the housing market has put in a bottom, JPM may be the company to believe in. For those a bit more grounded in reality, realize…

For those who still do not believe that the Fed’s ZIRP is starving the banks, I strongly suggest reading Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe Monday, March 28th, 2011, as excerpted:

Do
Black Swans Really Matter? Not As Much as the Circle of Life, The
Circle Purposely Disrupted By Multiple Central Banks Worldwide!!!,
Bernanke et. al. have snipped the chrysalis of the US markets and
economy one too many times. He has interrupted the circle of life…

I have always been of the contention that
the 2008 market crash was cut short by the global machinations of a
cadre of central bankers intent on somehow rewriting the rules of
economics, investment physics and global finance. They became the
buyers of last resort, then consequently the buyers of only resort
while at the same time flooding the world with liquidity and
guarantees. These central bankers and the countries they allegedly
strive to serve took on the debt and nigh worthless assets of the
private sector who threw prudence through the window during the “Peak”
phase of the circle of economic life, and engaged in rampant
speculation. Click to enlarge to print quality…

“Great Global Macro Experiment” is a market crash that never completed. BoomBustBlog subscribers should reference The Inevitability of Another Bank Crisis while non-subscribers should see Is Another Banking Crisis Inevitable? as well as The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. All four corners of the globe are currently “hobbling along on one leg”, under the pretense of a “global recovery”.

Reminisce while traipsing through our real estate analysis and research:

1. On Employment and Real Estate Recovery Monday, April 25th, 2011
2. A First In The History Of Mainstream Media? NAR Is Identified As A Joke! Tuesday, March 29th, 2011
3. The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011
4. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
5. Further Proof Of The Worsening Of The Real Estate Depression Thursday, February 24th, 2011
6. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
7. When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? Tuesday, February 22nd, 2011

Comments

[moneymutt]

when will fundementals actually bite them? I'm tired of waiting...

[adonisdemilo]

reggie i think you got my share when they gave out the brains

brilliant analysis, as usual

why not apply your grey cells to the Morgue silver con and see what's hidden there

[Life of Illusion]

Central planned real estate market will continue for years. Intervention recently produced consolidated debt collection by a controlled few. The main objective was to keep the chain of payments going. Debt collection with controlled debt-deflation will go on for years as liquidity is guaranteed at taxpayer expense. Debt will be paid down and asset prices will continue to devalue phase by central planning phase year after year.

Don’t count on matter of months as it will take years before investment pricing is feasible. In nominal terms it is even worse.

Thanks for all your work.

[NuYawkFrankie]

You da man Reggie!

Hey - Kate Middleton any relation?

[JW n FL]

JWnFL James Workman There’s Something Fishy at the House of Morgan http://j.mp/eADgmg via @AddToAny Reggie Middleton is Brilliant! Must Read / Risk Assessment!

[Paul Krugman]

Excited to see you are back to writing good columns on good subjects. Hopefully, you've given up on bashing Apple, because it demolishes your credibility in other areas.

[mendigo]

Is this JPM's problem or the taxpayers problem?

When JPM feels threatened by mortgage litigation, won't the judges be forced to rule in their favor?

[barkster]

me thinks you have a good point...  it is currently the morgue's problem but will become a taxpayer problem (or perhaps, more correctly, a saver's problem). sorry to be repetitive but anyone interested in the inflation/deflation debate and how all the debt will be bailed out HAS TO READ this article http://fofoa.blogspot.com/

[Bansters-in-my-...]

IS THIS AN ADVERTISING PLUG...

OR AN ARTICLE.???

[RockyRacoon]

He who tooteth not his own horn findeth his horn untooted.

[takinthehighway]

When one produces a product of consistently high quality, one should not be denigrated for being proud of same...

[Basia]

When Middleton talks, I listen........

[Careless Whisper]

me too.

reggie is awesome. yeah that loan loss reserve account is now used as a slush fund. but reggie, what about their silver short? i see a lot of estimates that jpm is short 1 billion ounces or more. but i haven't seen any legit analysis. any way you can tackle this issue ???

[LawsofPhysics]

Soon to revised, buried further, burnt, denied, etc..  just in time for WWIII

[falak pema]

Real estate the top of the JPM iceberg...Derivatives and commodity hedges the bottom of the unseen iceberg...wow, if the leverage goes sour when QE stops and interest rates go up...and WS dices...time to sell JPM to the Chinese Morgue...for a song...RM is already singing the obituary...

[barkster]

the morgue will be bailed out - qe to infinity...

and here is the fed's blueprint to bail them out (excellent, excellent article btw...)  http://fofoa.blogspot.com/

[falak pema]

You're forgetting the Chinese 2T clamper warning. QE-3 means open monetary war between USA and China, with all BRIC countries joining China camp. If Saudi goes that way its end USD! Euro and Yen don't count as they are zombies aligning with highest bidder in this war.

[disabledvet]

"When I was just a little boy, standing on my Pappy's knee/  My pappy said son don't let the man getcha, do what he done to me...

[Sudden Debt]

It must have been a typo.

All banks are healthy!

Ben said so!

[Dr. Richard Head]

Exactly.  The stress tests showed adequate reserves and by adequate they mean nonexistent.  Carry on fractional reserve bankers.  Carry on.