Unlike previous quarters when JPM's earnings release was a jumble of legal addbacks, MBS charge offs and loan-loss reserve releases, this time it was positively tame by comparison.
As the table below shows, while JPM's top line declined both over the quarter and over the year, declining by $806 million Y/Y to $24.5 billion, this was fractionally above the expected $24.4 billion.
[7]
On the other hand, despite the decline in revenues, reported EPS rose by $0.08 Y/Y to $1.54, above the expected $1.45, driven by two things: a $931 million decline in expenses mostly on the investment banking side, and $1 billion more in stock buybacks.
But back to revenues where we find that, for yet one more quarter, the Jefferies glimpse into Q2 fixed income trading was spot on: [8]for JPM the weakness in bond market trading meant Fixed Income revenues tumbled by $773 million to $2.9 billion, well below what most analysts had expected. Recall what we wrote 3 weeks ago: "Bond Trading Revenues Are Plunging On Wall Street, And Why It Is Going To Get Worse [8]" - JPM just confirmed it.
JPM's official explanation for this disappointing result: "Fixed Income Markets of $2.9B, down 10% YoY primarily driven by continued weakness in Credit and Securitized Products as well as lower revenue in Currencies & Emerging
Markets."
[9]
And while banking revenue also dropped modestly Q/Q and Y/Y, the only silver lining was equity markets which managed to increase modestly by $333MM to $1.6 billion in Q2.
Once again, however, the biggest surprise on this page is the drop in expenses which helped JPM not miss EPS despite a drop in revenues: "Expense of $5.1B, down 15% YoY, driven by business simplification, lower legal expense and lower compensation expense."
Translation: not good for the year end bonus outlook.
Also not good: Net Interest Margin barely rose in the quarter: "Firm NIM up 2 bps QoQ to 2.09%, primarily driven by lower cash balances and higher loan balances, largely offset by lower loan yields."
As a reminder, the reason bank stocks have been soaring is due to hopes rising yields will push NIM much higher and allow banks like JPM to generate a revenue windfall. So far, not so good.
Also notable: a somewhat muted warning JPM makes about Q3 revenues, when it says that "for 3Q15, expect business simplification to generate YoY negative variance in Markets revenue of 9%, with an associated reduction in expense."
In Greenspan-untranslated terms, this means revenues will drop big, however JPM hopes to fire even more people to offset the topline drop.
[10]
A dash of good news: JPM appears finally done using the non-GAAP piggybank which is loan-loss reserve release addback, with just over $100mm in "earnings" generated from accounting gimmicks.
But perhaps the most surprising result in the entire JPM presentation was the dramatic plunge in deposits, which according to the table below have plunged by over $100 billion in the first half as JPM purges "non-performing deposits."
[11]
Here is what JPM has to say about this curious deleveraging:
- Balance sheet down by $123B YTD, driven by reduction in non-operating deposits
- EOP deposit balances down ~$76B, with mix shift into more stable deposits
- CCB deposits up $28B
- Decline of ~$104B in other LOB deposits – driven by more than $100B reduction in non-operating deposits
And the punchline:
- Loans-to-deposits ratio of 61%, up 5% since year-end
Should this come as a surprise? Hardly: recall from February "NIRP Officially Arrives In The US As JPM Starts Charging Fees On Deposits [12]" - we finally see the outcome of this rather odd strategy.
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Full investor presentation below:
