JPM Beats Thanks To $3 Billion Reserve Release But FICC Revenue Misses

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by Tyler Durden
Tuesday, Jul 13, 2021 - 07:16 AM

And so Q2 earnings season has officially kicked off with JPM report second quarter results which beat on the top and bottom line, however much of the beat is being attributed to a generous $3 billion "one-time" reserve release, while the bank's all important FICC trading group reported a modest miss.

Here are the Q1 details:

  • Adjusted revenue $31.40 billion, which came not only higher than the consensus estimate of $30.06 billion but above the highest forecast in of $31.35 billion.
    • FICC sales & trading revenue $4.10 billion, -44% y/y, estimate $4.12 billion
    • Equities sales & trading revenue $2.69 billion, +13% y/y, estimate $2.21 billion
    • Investment banking revenue hit a record $3.57 billion, beating estimates of $2.94 billion
  • Net Income of $11.5BN which translates to $3.78/share, above the consensus estimate of $3.15

JPM said that a big part of the increase on revenue came from a 15% jump in deposits and an increase in debit transactions (thanks stimmy checks). The firm did warn that it’s seen deposit margin compression and that that’s weighed on its business.

Notably, the bottom line number included a $3 billion reserve release, which net of $734BN in charge offs (below the $1.24BN expected) meant a $2.3 billion drop in credit costs.

A detailed breakdown of the bank's reserve releases shows that the majority of the favorable treatment ($1.8BN) came from the consumer credit cards with the Consumer division contributing $2.6 billion of the total $3 billion in releases, and another $400mm coming from wholesale.

And visually:

Commenting on the massive reserve release, Jamie Dimon said that “JPMorgan Chase delivered solid performance across our businesses as we generated over $30 billion in revenue while continuing to make significant investments in technology, people and market expansion. This quarter we once again benefited from a significant reserve release as the environment continues to improve, but as we have said before, we do not consider these core or recurring profits."

As a result, Dimon instead focuses on earnings, not including the reserve release, which were $9.6 billion.

Courtesy of Bloomberg, here are some more big-picture numbers for a quarter that saw ROE of 18% (and ROTCE of 23%):

  • Average loans were flat, while average deposits were up 23%.
  • And $1.6 trillion of liquidity sources includes “HQLA and unencumbered marketable securities.”

However, when turning to the bank's all important Corporate and Investment Bank division, it is here that JPM disappointed, because as noted above, FICC revenue of $4.10BN came in just below the $4.12BN expected. The number was down 44% YoY, and was "driven by lower revenue across products as compared with a favorable performance in the prior year."

On the other hand, Equity sales and trading came in at $2.69BN, which was 13% higher than a year ago and also handily beat estimates of $2.21BN, and was "driven by record balances in prime brokerage, as well as strong performance in Cash Equities and derivatives."

Finally, 2Q Corporate and Investment Bank IB Fees also beat solidly, coming in at a record $3.57 billion, well above the  $3.13 billion estimate, and reflected "higher fees across all products," with JPM also disclosing that "the prior year included $659mm of markups on held-for-sale positions in the bridge book." Digging deeper, equity underwriting came in above estimates at $1.06 billion, compared with the $1.025 billion analysts expected, while advisory was also strong, printing at $916 million, and topping the $829 million median estimate.

As a result, total Markets Revenue was $13.2BN, down 19% while Net Income also dropped, but a more modest 9% Y/Y, to $5.0BN. Where did the operating leverage come from? Expenses of $6.5BN also declined YoY, shrinking by 4%, "driven by lower revenue-related expense, primarily performance-related compensation, partially offset by higher volume-related expense."

Spending on credit cards alone was $224 billion - a 51% jump from last year. The weird thing is that even as spending has come back, the loan growth in that business still hasn’t materialized. JPMorgan had $141.8 billion in card loans on its book at the end of the quarter, which was flat with the same period a year ago. So people are back out traveling and dining once again - but they’re now borrowing on their cards. As Bloomberg notes, a big question today might be when will that borrowing return?

It's also worth noting that JPM's auto business doesn’t seem to be having any trouble with loan growth: JPMorgan had about $68 billion in auto loans on its books at the end of the last quarter, a 14% increase compared to the same period a year ago.

The bank also reported a $233 million gain in its corporate and investment bank which it says is largely due to valuation adjustments in the current year. The firm says it had a $510 million gain last year in this area - at that point it was driven by funding spread tightening on derivatives.

Discussing the bank's Corporate & Investment Bank results, Jamie Dimon said that "Global IB fees are at an all-time high of $3.6 billion, up 25%, driven by an active M&A market as well as acquisition financing in DCM. Markets revenue, down 30% compared to a record last year, was up 25% versus 2019 on strong client activity. Similarly, Commercial Banking earned gross IB revenue of $1.2 billion, up 37%."

It was interesting that to avoid base effect distortions, Jamie Dimon compared second-quarter figures to what he deemed “the more normal, pre-pandemic second quarter of 2019.” That's a new one for a bank, and certainly for the analyst community, and we have to see if other banks piggyback on this to "normalize" for last year's bumper results.

Turning to the bank's Consumer & Community Banking, Dimon said that "combined debit and credit card spend was up 45%, or up 22% versus the more normal, pre-pandemic second quarter of 2019. We saw accelerating growth across categories including in travel and entertainment, which returned to growth in June, up 13% vs. 2019. Originations in Home Lending, up 64% to $40 billion, and Auto, up 61% to $12 billion, remained very strong. However, CCB loans were down 3% reflecting elevated prepayments in mortgage and lower Card balances. Deposits were up 25%, and investment assets were up 36%, driven by market appreciation and positive net flows."

Finally, here is Dimon on Asset & Wealth Management: "AUM of $3 trillion grew 21% driven by higher asset values and strong net inflows, and loans were up 21% primarily driven by securities-based lending."

Looking ahead, there were no major surprises with one exception, with the bank projecting 2021 Net Interest Income of $52.5BN, assuming a NCO rate below 2.5%, and full year adjusted expenses of $71BN, higher than the Wall Street forecast of $70BN

In kneejerk response, JPMorgan's stock fell as much as 1.8% in premarket trading Tuesday, dragging U.S. banks stocks lower, as traders focused on the $3BN reserve release driving much of the bottom line beat, while souring on JPM's FICC miss.

The miss on FICC trading revenue also weighed on some of the European lenders with Barclays and Deutsche Bank both hitting session lows just now. Banking stocks are Europe’s worst performing sector today, down 0.7% after some cautious comments from the ECB on capital returns to shareholders. Other major bank stocks moving lower during premarket: Bank of America -0.9%, Citigroup -0.4%, Goldman Sachs -0.4% and Wells Fargo -0.6%; Morgan Stanley shares were unchanged.

As Bloomberg notes, "if this market reaction holds, it would mean JPMorgan’s stock has declined four straight times on the day the largest U.S. bank released its earnings results. Shares fell 1.9% in April, 1.8% in January and 1.6% in October. They’re currently down about 1.5%."

The full Q2 earnings presentation is below (pdf link)