ii view: Trading volatility aids JP Morgan

Shares in this US banking giant have fallen by 30% in 2020, but Q2 profit beat Wall Street forecasts.

Second-quarter results to the end of June

• Net revenue up 15 to $33.8 billion
• Net income down 51% to $4.68 billion
• Earnings per share down 51% to $1.38

Chief executive Jamie Dimon said:

“Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy. However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm. We ended the quarter with massive loss absorbing capacity - over $34 billion of credit reserves and total liquidity resources of $1.5 trillion, on top of $191 billion of CET1 capital, with significant earnings power that would allow us to absorb even more credit reserves if needed. This is why we can continue to serve all of our stakeholders and to pay our dividend - unless the economic situation deteriorates materially and significantly.”

ii round-up:

Surges in bond and equity trading helped offset further Covid-19 bad debt provisions at US banking giant JP Morgan (NYSE:JPM), with second-quarter earnings per share beating analyst forecasts. 

Bond trading revenues nearly doubled, while equity revenues jumped by 38% given a backdrop of highly volatile coronavirus markets, helping to offset a further near-$10 billion in bad debt provisions, or a $2.19 hit to earnings per share. 

Group second-quarter earnings of $1.38 per share beat analyst estimates of nearer to $1 per share. JP Morgan shares rose by more than 2% in early US trading, although they're still down around 30% year-to-date. 

The bank made a near-$7 billion bad debt provision in the first quarter to cover potential loan defaults caused by huge Covid-19 economic disruption. Continuing ultra-low interest rates also limit the opportunity for banks to widen profit margins between deposits and loans, hindering profit.

Shares of fellow US bank Wells Fargo (NYSE:WFC) fell by more than 5% after it posted a first quarterly loss since the financial crisis and cut its dividend. Wells shares have more than halved in 2020.

In mid-May, JP Morgan declared a quarterly dividend of 90 US cents per share, unchanged from the previous two quarters. But it today suspended its share buyback plans through to at least the end of September. As in the UK, US regulators have been urging caution with regard to shareholder returns, favouring lending to customers. 

CEO Jamie Dimon continued to underline what he describes as the bank’s “fortress balance sheet.”

ii view:

JP Morgan is a highly diverse US banking giant. Its operations cover both traditional consumer and corporate banking, along with investment banking and asset management. With North America generating around three-quarters of its revenue, the bank is seen as offering a broader health check on the wider US economy. 

The International Monetary Fund (IMF) previously forecast the worst recession since the Great Depression, but JP Morgan has moved quickly to cover what Jamie Dimon expects to be a severe recession.

For investors, given the fallout and subsequent rebuilding of balance sheets from the financial crisis, US banks have generally come into this crisis in good shape – including JP Morgan. Despite recent health issues, the long serving experience of its chief executive also offers reassurance, while a dividend continues to be paid. But caution has seen the share buy back programme suspended, while an eventual reduction in US government economic aid and stimulus could see bad debt provisions rise further. 

Positives: 

• Business diversity
• Highly regarded chief executive

Negatives:

• Share buyback programme suspended
• Lower interest rates are broadly bad for bank profitability

The average rating of stock market analysts:

Buy