On the surface (i.e. non-GAAP), JPM's Q4 results came in stronger than expected, with adjusted EPS of $1.76 (or $6.7BN in net income) beating expectations of $1.69, while "managed revenue" of $25.45BN was in line with the $25.51BN expected.
GAAP EPS was far lower, or $1.07, as a result of a substantial $2.446 billion after-tax charge for the republican tax cut. JPM also reported that average core loans were up 6% YoY and 2% QoQ, while the bank's provision for credit losses was $1.31BN, below the $1.48BN expected.
However going forward, in a detailed breakdown of how the TCJA will impact operations, JPM said that it expects the effective tax rate to be ~19% in 2018 and ~20% in the near-term. The company also stated that it expects "tax reform to be a catalyst for economic activity and growth"
JPM also had some comments on how tax reform will affect its business:
Will JPM actually repatriate cash and if so how will it be used?
- No significant remittance of cash expected – we have capital and liquidity requirements in foreign entities – it is a deemed repatriation
Why does a reduction of 14% in the federal tax rate translate into a lower reduction in the JPM effective tax rate?
- Difference driven by the geographic mix of taxable income, nondeductibility of FDIC fees and the impact of a lower tax rate on other deductions
What is JPM doing to share the benefit with its employees, customers and communities?
In addition to programs already in place, we are planning a broad set of strategic and sustainable benefits for our employees, customers and communities
When asked what will be the impact on JPM’s businesses, the bank had this to say:
- IB fees – positive for M&A and ECM, negative for DCM – overall net positive
- Corporate Lending – supportive to corporate loan demand over time
- Home Lending – small negative (home price appreciation slightly lower) but de minimis overall impact to demand
Commenting on the results, Jamie Dimon said:
U.S. companies will be more competitive globally, which will ultimately benefit all Americans. The cumulative effect of retained and reinvested capital in the U.S. will help grow the economy, ultimately growing jobs and wages. We have always invested, even in difficult times, in our employees, customers and communities, and as a result of the tax plan we will be increasing and accelerating some of these investments.”
While all of this was boilerplate, what was more interesting was the ongoing collapse in the company's trading revenues, which while expected to decline, tumbled in Q4 with total markets revenue down 26% to $3.4 Billion in Q4. Of note, Fixed Income Markets revenue of $2.2B, was down a whopping 34% YoY, although the number would have been -27% excluding tax impact. Once again, JPM blamed the record low volatility and the credit bubble, explaining that the decline was "driven by low volatility and tighter credit spreads against a strong prior year quarter."
What was even more interesting however, is JPM's explanation that while Q4 Equity Sales and Trading revenue was flat at $1.148BN, the number included "a $143 million loss on a margin loan to a single client." JPM also said that it was subject to credit costs of $130mm driven by a reserve build for the same single client.
It is unclear who the client, or what the nature of the loan is, and we expect this to be a hot topic on the conference call today. That and bitcoin of course.
This is what the company said in the press release:
Markets & Investor Services revenue was $4.4 billion, down 22%, driven by lower Markets revenue, down 26%. Fixed Income Markets revenue was down 34% against a strong prior year, driven by continued low volatility, tighter credit spreads, and the impact from the TCJA on tax-oriented investments of $259 million. Excluding the TCJA impact, Fixed Income Markets revenue was down 27%. Equity Markets revenue was flat compared to a strong prior year and included the impact of a mark-to-market loss of $143 million on a margin loan to a single client. Excluding the mark-to-market loss, Equity Markets revenue was up 12%, driven by strength in Prime Services, Cash Equities and corporate derivatives. Securities Services revenue was $1.0 billion, up 14%, driven by higher interest rates and deposit growth, as well as higher asset-based fees driven by improving market levels.
Rounding up the segment, Investment Banking revenue of $1.64BN was a $150MM improvement from a year ago, if below the $1.66BN expected.
The good news for JPM traders: "Expense of $4.5B, up 8% YoY, driven by higher compensation expense." Translation: bonuses are going up.
What about JPM's loan book? Well, 4Q average core loans were up 6% y/y, 2% q/q as noted above, with the following detail:
In CCB, Consumer & Business Banking net rev. rose 16%, on higher deposit margins, strong deposit growth
- Home lending net rev. fell 15%, driven by lower net servicing revenue, loan spread compression
- Card, Merchant Services & Auto net rev. up 11%, driven by higher auto lease volumes, net interest income on higher card loan balances and margins, and lower card new account origination costs
- Noninterest expense $6.7b, up 6% on higher auto lease depreciation, business growth
- Provision for credit losses $1.2b, up $282m, driven by net reserve build of $15m, including $200m in card driven by loan growth, offset by reserve releases of $15m in home lending due to continued improvement in home prices, delinquencies and $35m in auto
- Credit card sales volume, merchant processing volume each up 13%
In CIB, provision for credit losses was expense of $130m, driven by a reserve build for single client
In CB, provision for credit losses was benefit of $62m, largely driven by reserve releases in oil, gas portfolio
* * *
Finally, looking forward JPM gave the following outlook:
- As a result of the change in tax rate due to TCJA, expect a reduction in tax-equivalent adjustments, decreasing both managed revenue and managed tax expense by ~$1.2B on an annual run-rate basis
- New revenue recognition accounting rule expected to increase both FY2018 revenue and expense by ~$1.2B, with the vast majority of the impact in AWM
- Expect FY2018 effective tax rate to be ~19%
- Expect 1Q18 net interest income to be modestly lower QoQ due to the impact of TCJA and day count
We said finally because this quarter's presentation was surprisingly thin, with little discussion of either credit trends, the company's NIM, or pretty much any other deep dive into the bank's balance sheet, something JPM has traditionally done in prior quarters.
How did the market respond to all that? JPM stock first dropped, then rose, and is now unchanged.
Full JPM Q4 presentaiton below (link).