JPM Beats Thanks To $1.4 Billion Reserve Release; Net Interest Margin Drops To Record Low; Mortgage Production Slides
Cutting through the noise of JPM's earnings, here are the salient facts: the company beat the bottom line expectation of $1.45 with an $1.60 ex-DVA print. However, this number included the now traditional "puffery" benefit from loan loss reserve releases, specifically $950MM pretax ($0.15 EPS) from mortgage loan loss reserves and $550MM pretax ($0.09) from credit cards. Additionally, the company reserved a whopping $600 million for litigation, or about $0.09, and according to the firm this should be backed out from the bottom line. Of course, that assumes the litigation against JPM will not be an ongoing, non-onetime event. In other words, ex-releases, JPM misses, however it was right in line if one assumes the litigation reserve was indeed one-time. In summary, the firm had a total of $19.4 billion in loan loss reserves and the release of $1.4 billion was the biggest since Q3 2012.
The bottom line adjustment highlights are reflected below:
What is worse going forward was the slide in Mortgage Production pretax income which was $582mm, down a whopping $349mm YoY, "reflecting lower margins and higher expense, partially offset by higher volumes and lower repurchase losses." For those curious how the rate spike has impacted JPM, here it is: mortgage originations down 7% Q/Q, and firmwide it dropped to $52 billion.
But perhaps the worst news is that despite the dramatic spike up in yields at the end of the quarter, JPM reported a Net Interest Margin that in Q2 was the lowest ever! Dropping to just 1.05% on a market-based basis, the firm's defined NIM slid to 2.20%. One can see why the Fed is desperate to push the long end higher, however without the offseting bear flattening and without a collapse in stock prices: Jamie Dimon is making the least amount of cash on the curve arb ever. The firm's outlook: "Expect NIM relatively stable in the second half of 2013." So record low rates will continue?
Then looking at the firm's beating heart: it's trading desk, we find that Fixed Income Markets and Equity Markets revenue tumbled by $674MM and $44MM in Q2 from the previous quarter on plunging volumes, although trading revenues did rise by $0.8 billion from a year ago. Expenses rose by 8% to $5.7 billion "driven by higher compensation expense." At least someone is paying their bankers more.
Also notable in the slide above: average VaR plunged to $40MM from $75MM a year ago and just $62MM last quarter. It is unclear if this is due to the n-th consecutive firm revision of how it defines its VaR.
Finally, JPM's European exposure rose modestly from $12.3bn in Q1 to $14.1 bn, driven by a rise in Spanish exposure from $3.4bn to $5.2, offset by a drop in Italy exposure from $7.1bn to $5.8bn, and the balance of the PIIGS increasing from $1.8bn to $3.1bn. In the firm's words, net exposure increased due to roll-off of tranched index positions, resulting in a $4 billion increase in exposure.
Full presentation slidedeck:
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