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JPM Beats Thanks To $1.4 Billion Reserve Release; Net Interest Margin Drops To Record Low; Mortgage Production Slides

Tyler Durden's picture




 

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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Fri, 07/12/2013 - 07:46 | 3744417 Ban KKiller
Ban KKiller's picture

Continuing criminal enterprises will have continuing litigation costs in the millions.

Fri, 07/12/2013 - 07:50 | 3744425 ghengis86
ghengis86's picture

And profits from those criminal activities in the billions!

Ain't Amerika grand?

Fri, 07/12/2013 - 08:00 | 3744439 jaap
jaap's picture

Now solve this puzzle (from Harvey Organs Blog):

 

JPMorgan's dealer vault registers tonight 401,877.493 oz.

Somehow we have a huge negative balance as   i) the gold has not left JPMorgan's dealer account and has yet to settle

and

ii) it is now deficient by 98,122.51 oz   (401,877.493 inventory - 500,000 oz issued =  -98,122.51 oz)

In other words, the entire 401,877.493 oz must be first transferred out of Morgan's dealer category ( in the same format as in the customer category) leaving it with zero,  plus the 98,122.51 of additional deficient gold

Fri, 07/12/2013 - 08:06 | 3744450 Alpo for Granny
Alpo for Granny's picture

To add to this puzzle I read somewhere (I think Ed Steer's newsletter) that JPM has accumulated 7.4 million oz of silver in the first 6 trading days of July.

So they are pukeing gold and stacking silver?

Fri, 07/12/2013 - 08:20 | 3744470 max2205
max2205's picture

Ben and Jamie dont need printers, they just pull the numbers out of their asses

Fri, 07/12/2013 - 07:49 | 3744423 eclectic syncretist
eclectic syncretist's picture

Excellent analysis of a bunch of bullshit smoke and mirrors fantasy.

Fri, 07/12/2013 - 08:18 | 3744465 Mae Kadoodie
Mae Kadoodie's picture

Loan loss reserves=Convoluted accounting bullshit.

Fri, 07/12/2013 - 08:24 | 3744477 Archimedes
Archimedes's picture

Guys, they are releasing loan loss reserves because The Bernank is buying all their toxic mortgages and crack shacks in Detroit at full value.

Fri, 07/12/2013 - 08:25 | 3744480 ParkAveFlasher
ParkAveFlasher's picture

Isn't the entire business a "loss reserve"?

Fri, 07/12/2013 - 07:55 | 3744428 thismarketisrigged
thismarketisrigged's picture

as i stated yesterday ( not that anyone who reads zerohedge couldnt have seen this coming) when we have a day like yesterday to the downside, futures are going to spike up erasing all losses from previous day.

 

however, when its to the upside, the next day is either up 50-60 pts or flat to the downside.

 

sure enough, on this bullshit report, it should be enough to pump a broad market rally.

 

jpm should fucking be trading at 10 dollars a share, and jamie dimon should be in jail for the londol whales 6 billion loss for investors.

 

Fri, 07/12/2013 - 07:56 | 3744430 Northeaster
Northeaster's picture

In NY, they have a couple WARN notices.

It's too bad we no longer have vigilante public hangings (after a quick kangaroo court style trial for due process so they know how it feels) for TBTF/SIFI's and their enablers in CONgress.

Fri, 07/12/2013 - 08:01 | 3744442 asteroids
asteroids's picture

If JPM is one of the strong, I wonder what results from the weak will be like.

Fri, 07/12/2013 - 08:33 | 3744496 Cursive
Cursive's picture

@asteriods

LOL.  The "reporters" only need to change the bank name:

 

(Reuters) - Wells Fargo & Co (WFC), the biggest U.S. mortgage lender, reported a 20 percent rise in second-quarter profit on Friday as it set aside less money to cover bad loans.

The fourth-biggest U.S. bank's net income applicable to common stockholders rose to $5.27 billion, or 98 cents per share, from $4.40 billion, or 82 cents per share, a year earlier.

(Reporting by Anil D'Silva in Bangalore and Peter Rudegeair in New York; Editing by Ted Kerr)

 

Fri, 07/12/2013 - 08:05 | 3744448 PaperBear
PaperBear's picture

"mortgage originations down 7% Q/Q"  - is this on track for a 30% annual drop ?

Fri, 07/12/2013 - 08:19 | 3744468 pitz
pitz's picture

Pushing the long-end higher destroys their balance sheet, does it not?  Why are you suggesting that the Fed is desperate to do this?  It would seem that pushing long-term interest rates higher, through QE or its withdrawal (either scenario will eventually accomplish the same) would be quite damaging to JPM and most of the US banking system.

Fri, 07/12/2013 - 08:23 | 3744473 John Ford Kennedy
John Ford Kennedy's picture

950MM+550MM = 1.4B?

Fri, 07/12/2013 - 08:48 | 3744541 Imminent Crucible
Imminent Crucible's picture

950MM+550MM = 1.4B?

Yeah, it's net of Jamie's $100M performance bonus for the quarter. If you want to keep talent, you gotta compensate them well, especially in the heist business.

Fri, 07/12/2013 - 09:17 | 3744644 Accounting101
Accounting101's picture

Did I just hear Cramer and the other two useful idiots on CNBC make the claim that the big banks saved the entire financial system in 2008?

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