The much anticipated JPM earnings are out [7]and while the company beat superficially, posting Q4 revenue of $24.4 billion vs expectations of $24.3 billion, and adjusted EPS of $1.35 "ex-items" vs expected $1.22, the real story as usual is below the surface. And in this case below the surface means what happens with the firm's Net Interest Margin, Trading Revenues, Loan Loss Reserve Releases and, of course, the busted "CIO and Treasury" aka London Whale unit. Starting with the last we have this: "Treasury and CIO reported a net loss of $157 million, compared with net income of $417 million in the prior year. Net revenue was a loss of $110 million, compared with net revenue of $845 million in the prior year. Net revenue included net securities gains of $103 million from sales of available-for-sale investment securities during the current quarter and principal transactions revenue of $99 million. Net interest income was a loss of $388 million due to low interest rates and limited reinvestment opportunities." JPM also warned to "Expect Treasury and CIO net loss of $300mm +/- in 1Q13; likely to vary each quarter."
Funny how the once amazingly profitable CIO is no longer is a cash cow when it can't invest excess deposits and recycle reserves via repo into cornering the IG market. Next, loan loss reserve releases amounted to some $0.9 billion in Q4, with total loan losses declining to $21.9 billion in Q4. This is 15% of the reported net income even as nonperforming loans rise by $1.7 billion compared to Q4 2011.
Trading revenues were better than Q4 2011, but much weaker than Q3 with fixed income markets revenues amounting to $3.2 billion, down $0.5 billion from Q3, and equity markets $0.9 billion, down $149MM from the last quarter. The reported VaR declined to $106 from Q3's $122, but up from the $75 in Q4 2011, which was reported pre-CIO bust. Total assets under custody rose to a whopping $18.8 trillion, up from $18.2 trillion last quarter, and $16.9 trillion in Q4 2011. $18.8 trillion?
Finally, the Net Interest Margin, firmwide and core, declined by 3 and 7 bps respectively QoQ due to, per JPM, lower loan yields, lower yields on investment securities; limited reinvestment opportunities; and higher balances in Fed funds sold and certain secured financings. In other words, ZIRP continues to take its toll on a bank which can no longer be a hedge fund and which can't make money on the NIM curve.
Oh, and those curious who is buying Italian loans? It's JPM (among others): JPM reports $13.9B total firmwide European peripheral net exposure as of 4Q12, up from $11.7B as of 3Q12. Net exposure increased primarily due to the impact of client transactions in Italy.
From the earnings supplement [8], here are the full Q4 results:
[9]
One time charges:
[10]
Loan Loss Reserve Release:
[11]
JPM banking and trading revenues:
[12]
Net Interest Margin:
[13]
European Exposure:
[14]
Full report: