JPMorgan Just Did Something It Has Not Done In 6 Years
Yesterday we reported something disturbing: a small regional bank, BOK Financial, announced that it had underestimated its exposure to energy loans, or rather loan, issued by just one company, and as a result its previously forecasted provision for credit losses of $3.5 million to $8.5 million would be insufficient, and due to the unexpected loan impairment it would have to take a dramatic $22.5 million in credit losses." As a result BOKF stock crashed and is now trading at levels not seen since 2010.
The reason this is troubling is because as we said yesterday "banks have taken every possible opportunity to assure investors they all overly provisioned for any potential losses stemming from their exposure to impaired energy loans."
Clearly when it came to at least one lender this was not the case. And now the attention shifts to all the other banks, which brings us to the first big bank to report earnings earlier today, JPM.
Earlier we spread the company's financials and showed that while revenues had barely grown, and in the all important Investment Banking and Trading division revenues actually declined (offset with big cuts to compensation expenses, read bonuses), something else stood out: when skimming through the company's loan loss reserve disclosure, we found that in Q4 JPM did something it hasn't done in 6 years: for the first time in 22 quarters, or since March 2010, JPM actually increased its loan loss provisions by $89 million, instead of reducing this amount.
Indicatively, after peaking at $38.2 billion in Q1 2010, the amount of loan loss reserves had declined by $24.7 billion (an amount that went straight to JPM's net income line) through Q3 2015, before rising for the first time in 6 years in the fourth quarter.
As JPM disclosed in its earnings presentation, it had taken a "reserve build of ~$100mm driven by $60mm in Oil & Gas and $26mm in Metals & Mining" within the commercial banking group."
In other words, after half a decade of smooth sailing, Jamie Dimon is starting to get concerned. This is what he said during the JPM earnings call:
JP MORGAN'S DIMON SAYS NOT WORRIED ABOUT BIG OIL COMPANIES, PROVISIONS ARE INCREASED AGAINST SMALLER ENERGY FIRMS
So JPM is not worried about big oil companies for now, but by implication it is worried about "smaller energy firms." The problem is that "smaller energy firms" account for about half of the production and the leverage in the US shale space, and many US banks - if not JPM - are directly exposed to them.
Which brings us back to the original question: if a regional bank like BOK Financial was slammed by just one loan (to what we can only assume was a smaller energy firm), where does the buck stop, and how many other regional, or even big, banks, are woefully underreserved in their exposure to energy loans. And most importantly, how long before the impairments and charges currently targeting smaller firms finally shift to the bigger ones: how underreserved is JPM for that eventuality?
As for the rest, earnings season is just getting started: we expect to find just who has been far more busy managing investor expectations instead of actually provisioning for soaring loan losses in the coming weeks. Remember: increasingly more managers are predicting that up to a third of US energy companies will go bankrupt if oil fails to rebound from current prices. And that is an eventuality no bank has provisioned for.
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