JPM Earnings Slide 8% On Drop In Trading Volume, Mortgage Production Offset By $1.5 Billion Stock Buyback

While JPM stock is trading modestly higher in the pre-market following its earnings report which beat expectations on the top and the bottom line, it doesn't hide a troubling trend seen across all the banks that have reported so far, one we forecast would take place in an environment of plunging trading volumes and near-record low mortgage production: slumping earnings. J.P. Morgan Chase JPM +0.88% & Co. said second-quarter earnings sank 7.9% as the bank continued to grapple with weak trading revenue. Indeed, as WSJ summarized, "J.P. Morgan Chase & Co. said second-quarter earnings sank 7.9% as the bank continued to grapple with weak trading revenue."

GAAP revenue was down 3% to $24.45 billion, and was down 2.3% on a non-GAAP (yes, non-GAAP revenue) basis to $25.35 billion. Still, this beat estimates of of $23.89 billion and is the reason for JPM's 2% rise. J.P. Morgan reported a profit of $6 billion, or $1.46 a share, compared with $6.5 billion, or $1.60 a share, a year earlier. The latest earnings figures included a legal expense of 13 cents a share.

A big driver in the EPS beat was JPM's repurchase of $1.5 billion in common stock, suggesting the bank has $5 billion left for buybacks for the Q3 2014-Q1 2015 period.

Notably, JPM's reserve release of $521 million was a key contributor to EPS, well above the $417 million reported a quarter ago and shows that when JPM needs to report a profit at all costs it will certainly resort to raiding the piggy bank.

One part of the reason for the ongoing contraction in JPM top and bottom line numbers: mortgage banking.

What JPM had to say about this:

  • Mortgage Production pretax income of $63mm, down $519mm YoY
    • Revenue, excluding repurchase, 74% lower YoY primarily on lower volumes; originations down 66% YoY and 1% QoQ
    • Partially offset by lower expenses and repurchase benefit
  • Mortgage Servicing pretax income of $479mm, up $346mm YoY
    • Net servicing-related revenue of $693mm, down 10% YoY
    • Servicing expense of $552mm, down 23% YoY
    • MSR risk management income of $338mm
  • Headcount down ~13,000 YoY and ~5,000 YTD

The other reason for declining profits: ongoing deterioration in the firm's trading volumes, offset partially by Investment Banking services.


From JPM:

  • Markets & Investor Services revenue
  • Markets revenue of $4.6B, down 14% YoY, primarily driven by:
    • Fixed Income Markets of $3.5B, down 15% YoY, on historically low levels of volatility and lower client activity across products
    • Equity Markets of $1.2B, down 10% YoY, primarily due to lower derivatives revenue
  • Securities Services revenue of $1.1B, up 5% YoY, primarily driven by higher NII on increased deposits
  • Credit Adjustments & Other gain of $125mm driven by net FVA/DVA

And, not surprisingly, just like with Wells and Citi, NIM declined yet again:


In conclusion, here is JPM's outlook:


Full presentation below:


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