JPM Reports Mediocre Q4 Earnings But Impresses With Stellar 2024 Forecast (Which Is Based On 6 Fed Cuts)

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by Tyler Durden
Friday, Jan 12, 2024 - 01:32 PM

As happens every quarter, moments ago JPM - the largest US bank - officially fired the starting gun on Q3 earnings season when it reported earnings which - largely still courtesy of the bank's taxpayer-funded g(r)ift of First Republic earlier this year - were solid (well maybe not that solid, with the first first dumping only to recover more than fully after the market realized how strong the bank's guidance was), beating on the bottom line, and despite some revenue weakness (in equity sales and trading and investment banking) and some gloomy comments from CEO Jamie Dimon, were well received by the market: it is the other US banks, and especially the smaller ones, that are a far more concerning prospect (especially after the BTFP bank bailout program ends in March), while JPM once again validates its "fortress balance sheet" especially with the benefit of the recent taxpayer-funded fortressization in the form of acquiring all First Republic good assets while stuffing Uncle Sam/FDIC/taxpayers with the bad ones.

First, here is a summary of what the bank just reported: the bank closed out the most profitable year in US banking history with its seventh consecutive quarter of record net interest income and a surprise forecast that the good times may continue in 2024.

Let's turn to the details, by taking a closer look at what the bank just reported for the just concluded fourth quarter:

  • Q4 Adjusted Revenue $39.94 billion, missing exp. of $40.23 billion, and while the print was up $2.5 billion from a year ago, it was the 2nd consecutive quarter of declines from a record high of $42.4 billion in Q2.
    • Q4 net interest income $24.18 billion, beating estimate $23.01 billion; the net yield on interest-earning assets was 2.81%, above the estimate 2.74% and up from 2.72 last quarter.

  • Q4 Net Income $9.3 billion, down 15% (and down 21% ex First Republic), as EPS dropped to $3.04, missing exp. $3.94, and down from $3.79 in Q4 '22 (the bank's effective rate was 17.8%, much lower than a “managed rate” of 26.7%)
    • That said, JPM noted that significant items included $2.9 billion FDIC special assessment. Adjusting for this "one-time chart", Net Income would have been $12.1 billion while EPS would come in at $3.97, beating estimates 

  • Provision for credit losses $2.762 billion, above the estimate $2.42 billion, and double the $1.384 billion in Q3
    • Net Charge offs more than doubled to $2.2 billion from $0.9 billion YoY, which however was below the expected $1.74 billion
    • Also of note, one quarter after JPM surprised the market with a $113 million release in loan loss reserves, the bank is back to preparing for the coming recession, and in Q4, it built reserves by $598 million, which however was still down from $1.4 billion a year ago.
  • Return on equity 12%, missing the estimate of 13.8%
  • Return on tangible common equity 15%, missing the estimate 18%
  • Net interest income was $24.49 billion, beating exp of $23.61 billion
  • Tangible book value per share $86.08

Some context here: as BBG's Max Abelson notes, everything about JPM is just staggering: "this bank’s standardized risk-weighted assets hit $1.7 trillion, its cash and marketable securities are $1.4 trillion, and average loans are near there at $1.3 trillion. The biggest gets bigger."

And speaking of bigger, JPMorgan just made more annual profit than any firm in US banking history: the $9.3 billion of net income in the fourth quarter means the biggest bank in US made $49.6 billion for the year, up 32% from last year and topping a record $48.3 billion from 2021.

As BBG notes, "JPMorgan is so vast, and makes so much money, that it can be hard to put either into context. But consider that the six biggest US banks didn’t have a $100 billion year until 2018. JPMorgan came close to making half that in 2023.

“There is nobody in the banking business that I’ve seen that compares,” Lee Raymond, the longtime oil executive who served on the bank’s board for decades, said late last year. “It’s really hard to see where anybody has done what JPMorgan has been able to do.”

Turning to Jamie Dimon's earnings statement, he called the bank's reported $9.3 billion “solid,” but points out that number would be $12.1 billion if it weren’t for the “FDIC special assessment and discretionary securities losses.”

"Our record results in 2023 reflect over-earning on both NII and credit, but we remain confident in our ability to continue to deliver very healthy returns even after they normalize. Our balance sheet remained extremely strong, with a CET1 ratio of 15.0%, a staggering $514 billion of total loss-absorbing capacity and $1.4 trillion in cash and marketable securities."

Why so much hate for the special FDIC assessment fee (which we saw last March just how important that fund can be with the collapses of Silicon Valley Bank and Signature Bank.) Well, after the FDIC dipped into that fund earlier last year, big banks like JPMorgan have been on the hook to now replenish it. The bill was expected to be around $3 billion, so the actual $2.9 billion charge is just shy of that prediction. Ironically, while Jamie loves the benefit Signature bank has led to his balance sheet (with virtually no cash out of his pocket) he hates the modest insurance payment he has to make to prepay for future Signature Banks. No surprises there.

Dimon also said that he continues to believe that the recent series of regulatory and legislative proposals, including Basel III endgame, "could cause serious harm to consumers, businesses, and markets. We hope that regulators will make the necessary adjustments so the rules promote a strong financial system without causing undue consequences for end users."

So why was the year so good? Dimon explains that the bank’s “record results” for 2023 “reflect over-earning on both NII and credit, but we remain confident in our ability to continue to deliver very healthy returns even after they normalize.” As Bloomberg's Max Abelson notes, this is a big deal: Dimon is hinting that these numbers can’t stay this big forever, though he doesn’t seem worried about a big fall, either.

That said, Dimon made a cautious remark about the soaring US deficit, saying that while "the U.S. economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing, It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus. There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs." This, Dimon warns, "may lead inflation to be stickier and rates to be higher than markets expect." We agree as discussed yesterday.

On top of this, Dimon warns that "there are a number of downside risks to watch. Quantitative tightening is draining over $900 billion of liquidity from the system annually, and we have never seen a full cycle of tightening. And the ongoing wars in Ukraine and the Middle East have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost. These significant and somewhat unprecedented forces cause us to remain cautious."

Looking at the balance sheet, JPM reported:

  • Loans: Average loans of $1.32T, below exp. $1.32 trillion, up 17% YoY and 1% QoQ
  • Deposits: average deposits of $2.40T, above exp. $2.36 trillion, flat YoY and up 1% QoQ, even as QT continues and is supposed to shrink bank balance sheets
  • CET1 capital of $251BN; total loss-absorbing capacity stands at $514BN.
    • Standardized and Advanced CET1 capital ratios of 15.0%

A quick tangent on just how much of a taxpayer gift the FDIC-funded handover of Signature Bank to JPM has been. Here is Bloomberg's analysis showing JPM results with and without Signature:

  • Firmwide, JPM average loans were up 17%, but up only 4% excluding First Republic
  • Average deposits were flat, or down 3% excluding First Republic
  • Net income was $9.3 billion, down 15%, or down 21% excluding First Republic
  • Net revenue was $39.9 billion, up 12%, or up 7% excluding First Republic
  • NII was $24.2 billion, up 19%, or up 12% excluding First Republic. (NII excluding markets was $23.6 billion, up 18%, or up 11% excluding First Republic)
  • Noninterest revenue was $15.8 billion, up 3%, or flat excluding First Republic.
  • Net income attributable to First Republic was $647 million, reflecting “$1.3 billion of net interest income, $533 million of noninterest revenue and $890 million of noninterest expense.”
  • Noninterest expense was $24.5 billion, up 29%, or up 24% excluding First Republic
  • In CCB, client investment assets were up 47%, but only up 25% excluding First Republic
  • In CCB, average loans were up 27%, and only up 6% excluding First Republic
  • In CB, average loans were up 19%, but only up 3% excluding First Republic
  • In AWM, average loans were up 6%, or only up 1% excluding First Republic

As noted above, the bank turned more cautious this quarter, with the provision for credit losses rising to $2.8 billion, reflecting net charge-offs of $2.2 billion and a net reserve build of $598 million. What was behind this increase? What else: Consumers. “The net reserve build included a $546 million net build in Consumer, driven by loan growth in Card Services, and a $41 million net build in Wholesale.”

What about those $2.2 billion of charge-offs? They were up $1.3 billion, “predominantly driven by Card Services and single-name exposures in Wholesale which were largely previously reserved.”  And for those keeping context, “prior-year provision was $2.3 billion, reflecting a net reserve build of $1.4 billion and net charge-offs of $887 million.”

As usual, the bank was quite generous in distributing shareholder capital in the form of:

  • Common dividend of $3.1B or $1.05 per share
  • $2.0B of common stock net repurchases
  • An LTM net payout of 41%

Next turning to JPM’s all important Corporate & Investment Bank (CIB) results, the bank reported revenue for the business at $10.96 billion, missing analyst estimates of $11.31 billion.

Drilling down, total banking revenue was $4.058 billion, of which investment banking revenue was $1.576 billion, missing estimates of $1.78 billion despite a 13% increase in investment banking fees, with the firm citing “higher debt and equity underwriting fees

Turning to the all important markets section we read:

  • Markets revenue of $5.8B, up 2% YoY
    • Fixed Income Markets revenue of $4.03BN, beating estimates of 3.84BN and up 8% YoY, driven by higher revenue in Securitized Products Group7 , partially offset by lower revenue in Rates
    • Equity Markets revenue of $1.78BN, missing estimates of $1.93 billion and down 8% YoY, driven by driven by "lower revenue in Derivatives and Cash."

Meanwhile, expenses in the group rose 4% to $6.8B, "predominantly driven by the timing of revenue-related  compensation." Finally, credit costs in the group were $210mm, with NCOs of $121mm and a net reserve build of $89mm.

Next, a quick look at JPMorgan’s Asset & Wealth Management division, where assets under management rose 24% to a record $3.4 trillion, “driven by continued net inflows and higher market levels.”

On the expense side, numbers are rising, no surprise there. With the bank sporting a record number of employees - rising to just shy of 310K -  more workers inherently means a bigger bill for compensation, which JPMorgan points out. As noted below, on the expense forecast slide of the presentation, the first-listed driver of 2024 expenses (which are expected to be somewhere in the $90 billion region) will be “business-growth-driven hiring, primarily in front office.”

All that said, readers can ignore most of what was written because what cemented the bank's stock turnaround in the premarket where it first fell as much as 4%, was its outlook on slide 12 of the presentation, which was unexpectedly hiked to a record $90BN, smashing estimates of an $86BN number, and setting Wall Street's minds at ease that the coming easing would somehow crippled JPM's profit juggernaut.

Yes, JPM makes money during hiking cycles; it now expects to make even more money during the coming easing cycle. Well, maybe not: becase as JPM reveals in a separate slide, the impact of the Fed's coming cuts in 2024 will lead to an $8BN drop in NII from a baseline of $97 billion. And what is more remarkable, Jamie Dimon now expects a whopping 6 rate cuts this year. Just how bad are things going to get?

Additionally, the bank also forecast full-year 2024 expense of $90 billion, driven by i) business-growth-driven hiring, primarily in front office; ii) Increase in technology spend associated with investments and higher business volumes, iii)  Continued investments in the business, iv) Marketing; v) Residual inflationary pressures and others...

.... and a card services net charge-off rate of less then 3.5%

The outlook was so surprising that after the stock had fallen as much as 4% after the bank first announced its historical data (before the NII flashing red headline hit), the bank's outlook was enough to stage a remarkable rebound in JPM stock which is now trading some 2% higher even as the rest of the banks in the space continue to trade flat or down amid mixed results from BofA, Wells and Citi.

Here is the full JPM investor presentation (pdf link).