Earlier today, in a surprising leak, JPM reported another batch of disappointing Q3 earnings well before the scheduled time. The reason for the early report, according to the WSJ, "an inadvertent early release by a third party website Tuesday meant J.P. Morgan’s financial supplement was in circulation hours before the scheduled 7 a.m ET. The statement was later removed from the site. J.P. Morgan said there appeared to have been a problem with Shareholder.com., the investor relations company owned by Nasdaq. Nasdaq didn’t immediately respond to requests for comment." So another Nasdaq glitch, and this time not at all related to the Facebook IPO Snafu.
So back to JPM's earnings which were more of the same.
We don't recall if JPM's legal charges in the past few years are now $20, $30, $40 billion or more, but as of this morning they are X + $1 billion. The reason: JPM will settle its latest market rigging "allegations", this time in FX [8], and as a result has set aside $1 billion in indulgences to pay its way away from corporate prison. And so in the company's ongoing mockery of the term "one-time, non-recurring", JPM added $1.062 billion in recurring, multiple-time pretax legal expenses, a $0.26 EPS impact to Pro Forma EPS, EPS which also declined courtesy of JPM's repurchase of $1.5 billion in shares in the quarter thus reducing the number of "S".
So what were the bottom line numbers:
- EPS $1.36, a miss to estimate of $1.39
- Revenue (non-GAAP revenue that is): $25.16 billion, better than the $24.43 billion; that said GAAP net revenue was $24.246 billion
- Non-interest expense rose tom $15.8 billion, well above the $14.52 billion expected, and more than the $15.43 billion Q/Q
In table format:
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Breaking down the key revenue items, the focus as always continued to be on Mortgage Banking, where we found the following:
- Mortgage Production pretax income of $74mm
- Revenues, excl. repurchase, down 33% YoY; Originations down 48% YoY, but up 26% QoQ
- Headcount down ~6,000 YTD7, on track to exceed prior 2014; guidance by ~1,000
In other words, the mortgage deterioration continues as the only good housing buyer is a cash buyer. But it wasn't just mortgage banking this time. For the first time in a while, Card, Merchant Services and Auto also stumbled: Net income of $1.1B, down 10% YoY
The reason: Credit costs of $846mm, up 26% YoY, driven by lower loan loss reserve releases, partially offset by lower net chargeoffs.
Well, that's not good. In fact, it gets worse:
The provision for credit losses was $902 million, compared with a benefit of $267 million in the prior year. The current-quarter provision reflected a $200 million reduction in the allowance for loan losses and total net charge-offs of $1.1 billion. The prior-year provision reflected a $1.6 billion reduction in the allowance for loan losses and total net charge-offs of $1.3 billion.
In other words, JPM starting to see a notable deterioration in credit quality and as a result is boosting credit loss reserves. Hardly good for a subprime-loan consumer driven "recovery."
And then there was Investment Banking, where things were about as bad as they have been in a while:
[10]
Notable: Fixed Income market unchanged from a quarter and a year ago; same with equity market and security services. As a reminder, it is these revenue lines that provide the biggest surprises on the margin. In other words, the trading doldrums in Q3 were just more of the same. Also notable: VaR of $35 is about the lowest it has ever been (net of all the London Whale copy paste fabrications).
And an interesting tangent: "Lending revenue of $147mm, down 58% YoY, primarily driven by losses on securities received from restructured loans" - did JPM get stuck with a bad debt-to-equity conversion that was so subtantial it impacted the entire firm? So it appears.
Then there was Commercial Banking, whose revenue of $1.7B was down 3% YoY and 2% QoQ.
And finally, no London Whale in the house anymore: Treasury and CIO net loss of $30mm, compared to a net loss of $46mm in 2Q14. In fact, as Reuters reported, no prop traders rigging FX any more either [11]:
JP Morgan's chief currency trader in London, Richard Usher, has left the bank, a source familiar with the matter said on Tuesday.
Usher was listed as "inactive" on the UK Financial Conduct Authority's register of approved individuals as of Oct. 6.
Usher, the head of spot G10 currency trading at the U.S. bank in London, had been suspended since October last year. It was unclear at the time whether that was related to the global investigation into allegations of collusion and manipulation in the world's currency market.
Usher could not be immediately reached for comment. An employee at the JP Morgan switchboard said there was no record of anyone called Usher on the worldwide directory.
Usher is also the reason why JPM suffered a $1 billion legal fee this quarter as he was the head of the "Cartel" FX rigging syndicate. "Allegedly" of course.
Going back to JPM's results, while we are happy to report that this quarter JPM only used up $437 in imaginary net income from loan loss reserve releases...
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... the bigger problem was that JPM's core NIM for the nth consecutive quarter, declined once again. Why the decline? Core NIM down 5 bps QoQ, largely due to:
Higher cash balances – up $27B QoQ; Lower loan yields. i.e. thanks Fed.
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As long as this fails to rise, JPM will simply be unable to post a notable improvement in profits.
Finally, here is JPM's forecast:
- Expect Firmwide adjusted expense to be above $58B for FY14; actual Firmwide expense will be affected by performance-related compensation for FY14
- Expect 4Q14 Markets revenue to be impacted by normal seasonal trends and business simplification
- Expect a $1B+ reduction in allowance for consumer loan losses over the next couple of years, as the credit quality of the portfolio continues to improve
- Expect small negative Production pretax income in 4Q14 – actual results will be market dependent
- Expect 4Q14 revenue to be down YoY, impacted by the absence of one-time proceeds of ~$100mm from a lending related workout
- Expect Servicing revenue to be at or slightly below $600mm in 4Q14, and to continue to decrease in 2015
- Expect FY14 pretax margin and ROE to be below TTC targets
In short: one of these quarters JPM will have actual good, undoctored news to report. Just not now, and probably not under Jamie Dimon's watch, who clearly wants to get the hell out of the sinking dodge.
Full presentation (pdf [14]):
