To anyone who carefully read yesterday's dismal Citi earnings report, which was a major disappointment in virtually every way and especially in the bank's FICC group, with the exception of Citi's core lending business which traders decided to focus on and push Citi's stock price 4% higher, today's disappointing JPMorgan results should not come as a surprise.
Actually, JPMorgan Q4 results were even worse than Citi's as they were a disappointment across the board, with both reported revenue of $26.1BN and "managed" revenue of $26.8BN missing consensus expectations of $26.9BN, while EPS of $1.98 was not only well below the $2.20 consensus, but was also the first JPM earnings miss in 15 quarters.
Commenting on the surprising miss, Wolfe Research's Steven Chubak wrote that the results were "very un-JPMorgan-like" and flagged the broad-based core miss, noting that JPMorgan "has a strong track record of delivering strong revenue/earnings beats and these results appear rather unremarkable. The lone bright spot was strong NII/core loan growth, but optimism here will likely be tempered by muted NII guidance'' for the first quarter, of "flat'' versus the prior quarter. "We expect shares to underperform, with the rest of the group likely to trade in sympathy."
Predictably, CEO Jamie Dimon, not used to posting disappointing results, quickly pivoted to politics, and said that "as we head into 2019, we urge our country’s leaders to strike a collaborative, constructive tone, which would reinforce already-strong consumer and business sentiment. Businesses, government and communities need to work together to solve problems and help strengthen the economy for the benefit of everyone."
While JPM also posted a modest increase in Net Interest Income, which rose $1.2BN Y/Y to $14.5BN, noninterest income for the largest US bank declined $0.1BN to $12.3BN Y/Y and also declined $1.5BN Q/Q.
JPMorgan also reported 4Q compensation expenses $7.81 billion, right on top of the estimate $7.81 billion; while the 4Q provision for credit losses of $1.55 billion was surprisingly higher than the estimate $1.31 billion. More surprisingly, JPM said it built a $150 million reserve in the consumer unit - that was driven by loan growth. The question is why, i.e., what is JPM seeing that's causing them to want to set aside more money to cover souring loans?
The bank also reported a firmwide net reserve build of $15mm – net build in Consumer of $54mm and net release in Wholesale of $39mm. Additionally, in the wholesale bank, there was a $161 million reserve build, the bank says that reflects the downgrade of "select" commercial and industrial customers.
But while the top and bottom-line miss were hardly what the market was expecting, what has slammed JPM stock this morning is the huge miss in the bank's trading group, with 4Q FICC sales & trading revenue of just $1.86 billion, down $361MM from a year ago (and $1.0BN from Q3) and far below the estimated $2.29 billion. And while equity sales & trading revenue was in line, printing at $1.32 billion or right on top of the estimate $1.32 billion (if also down $278MM from Q3), the FICC plunge stole the show with the worst QFICC trading revenue since the financial crisis.
JPM's FICC was so bad it was even worst than Citi's (for the 2nd straight quarter):
The bank blamed "challenging market conditions "for the revenue decline in FICC, while highlighting emerging markets as the one bright spot in Q4.
Also worth a quick note: while equity trading revenue looked solid at first glance, a good chunk of it is due to losses JPM suffered tied to the margin loan on Steinhoff in late 2017.
Elsewhere in the bank's investment bank group, 4Q investment banking revenue of $1.72 billion also missed estimates of $1.77 billion, virtually unchanged from a year ago.
Commenting on these disappointing trading results, JPM said that markets revenue of $3.2B was down 6% YoY, or down 11%YoY adjusted for the impact of tax reform and a loss on a margin loan in the prior year. Adjusted, Fixed Income Markets revenue was down 18% YoY, and Equity Markets revenue was up 2% YoY.
Surprisingly, JPM also reported a $243MM Credit Adjustments loss "reflecting higher funding spreads on derivatives." We hope to learn more on what this was for during the earnings call.
Furthermore, within corporate and investment banking, JPM provided for $82 million in credit losses "largely driven by reserve builds for select client downgrades."
Meanwhile, even as trading revenue tumbled, JPM reported Ibanking expense of $4.7B, up 3% YoY reflecting investments in the business and higher volume-related transaction costs, which however were offset by lower FDIC charges and lower performance-based compensation.
While the rest of the earnings were generally uneventful, it is worth noting (especially with Wells about to report) that JPM's Q4 mortgage origination volume was $18.7BN in Q4, down 30% from $26.6BN in Q4 2017 as mortgage activity continues to collapse across the industry. KBW analyst Bose George cited mortgage volumes tumbling 24% quarter-over-quarter versus consensus expectations of a 14% decline, and said that though "the read-across to the industry is negative," Wells Fargo results later will likely be "a bigger driver."
It is worth noting that net charge-offs in the overall consumer unit were lower, but as Bloomberg notes, the bank says there's a couple different directions happening within its different businesses. In home and auto lending, charge offs were down. But the card business saw higher net charge-offs.
And in another potential warning sign, spot in the consumer and community bank home lending numbers were also unexpectedly weak, with net revenue down 8 percent to $1.3 billion, "driven by lower net production revenue on margin compression and lower volumes.''
Indeed, JPMorgan's commercial bank, traditionally a bedrock of stability, posted a 2% drop in revenue to $2.3 billion in Q4; JPM blamed the drop on the absence of a one-time benefit that the bank got with the passage of tax reform a year ago. That said, the unit did see higher net interest income and improved deposit margins. The offsetting silver lining: spending on the company's consumer cards came in at $185.3 billion, a 10% increase from a year ago.
Looking ahead, JPM provided an outlook for Q1 2019, saying that net interest income will be "approximately flat" quarter over quarter and expects expenses to be up in the "mid-single digits" on a year-over-year basis.
As Bloomberg accurately cautions, "net interest income makes up about half of the company's overall revenues, so if a big driver of revenue is expected to be flat while expenses are expected to be up -- that might not bode well for increased profits." This is especially troubling in light of JPM's inability to boost its noninterest revenue, which has been flat int he past year.
Not surprisingly after what was easily the worst earnings report for JPM in over four years, the stock has tumbled.
And as we await Wells Fargo's earnings due out shortly, here is JPM's full earnings presentation.