Cramer: Goldman's Real Capital
JPMorgan Chase's ( JPM) second-quarter earnings were boosted by record investment banking fees, but unlike rival Goldman Sachs ( GS), a steadily deteriorating consumer loan book remains a dark cloud on its horizon. JPMorgan on Thursday posted a profit of 28 cents a share in the second quarter, down from 53 cents a year earlier, but far better than the 4 cents a share predicted by analysts. The results were weighed by a charge of $1.1 billion, or 27 cents a share, related to the company's repayment last month of the federal government's $25 preferred equity investment made through the Troubled Asset Relief Program. JPMorgan also was hit with a special assessment of 10 cents a share by the Federal Deposit Insurance Corp. The company said its $27.7 billion in revenue on a managed basis for the quarter was its best ever. The company recorded $19.67 billion in revenue in the year-ago quarter. Results were driven by record equity underwriting fees and fixed income markets revenue, much like Goldman reported on Tuesday.
While JPMorgan said on a conference call that it sees early signs of credit conditions improving, it acknowledges it is not out of the woods yet. The company still struggles with a troubled home equity portfolio as well as continued deterioration in its prime and subprime mortgage portfolios. In addition, the company's credit card portfolio continues to significantly worsen. JPMorgan Chase has already warned that it does not plan to make a profit in the cards business this year.
Isabel Schauerte, an analyst at Celent, a Boston-based financial research and consulting firm, says JPMorgan Chase's results, when compared to Goldman's, is a much better barometer of the troubled consumer economy, which is clearly pressuring "the bottom lines of banks with sizeable exposure to consumer lending and card services." "While all is quiet on JPMorgan's investment banking and trading fronts, the bank's traditional banking business has produced more dire results," she adds. Rochdale Securities analyst Richard Bove also noted the company's loan book as critical to its success. "The key in looking at these banks to us continues to be the direction of non-performing assets," he writes. "This was not good for this company." Management said during the call that the legacy Chase credit card portfolio had charge-offs of 8.97%, up 200 basis points from the first quarter, while the legacy Washington Mutual card portfolio had charge-offs that were "consistent" with its expectations of 18% to 24% losses. For the third quarter, the company expects losses to be roughly 10% for the Chase portfolio, and closer to 24% by the end of the year for the WaMu portfolio. The company has continued to lend, it says. JPMorgan has extended $150 billion in new credit to consumers, corporations, small businesses, municipalities and non-profits and has approved 138,000 trial mortgage modifications in the quarter, bringing total foreclosures prevented since 2007 to 565,000. JPMorgan Chase had a total of $29.07 billion in loan loss reserves at June 30, an addition of roughly $2 billion. The reserves represented a 5.01% ratio of loan losses to loans. Company-wide credit costs in the quarter totaled $9.69 billion, JPMorgan Chase said. At the end of June, the company had a Tier 1 capital ratio of 9.7% and a Tier 1 common ratio of 7.7%.
"I think the second you see things really stabilize, we won't need any additional reserves," Chairman and CEO Jamie Dimon said on the call. "That could be as early as next quarter; that could be some time next year." CFO Mike Cavanagh said during the analyst call that the company feels "very good about the overall reserving level." "We brought these levels up a lot in anticipation of deterioration," he said. "... We're doing everything that we think we should be doing to help the country get back on the road to recovery here." Cavanaugh cautioned that further reserve additions will be "dictated" by unemployment trends. "Obviously if it did that would have good implications for future loss trends and could mean that we could be getting near the end of needing to add to reserves in these portfolios," he said. JPMorgan, however, certainly had some parts of the business working at full strength. During the quarter, many companies raised debt and equity to recapitalize and refinance troubled balance sheets as the global economy sours, Dimon said. He sees that trend continuing as more companies look to fix their balance sheets to shield against the down economy, which will fuel further positive results in investment banking. "Obviously it will be lumpy and
dependant upon whether the markets are willing to accommodate big supplies of those things, but it's also been a global phenomenon," Dimon said during the analyst call. " It's possible you'll continue to have pretty active investment banking ... markets as people try to change and fix the balance sheets and get ready for new environments."
Commercial banking, asset management, Treasury and securities services and retail banking also were strong. Shares of JPMorgan Chase were falling on Thursday by 1% to $35.93. Analysts say investors should be cautious regarding regional bank earnings. They will likely follow in JPMorgan's footsteps regarding continued deterioration in credit quality. Large money center banks Bank of America ( BAC) and Citigroup ( C) as well as regionally focused banks BB&T ( BBT), Marshall & Ilsley ( MI) and First Horizon ( FHN) report earnings on Friday. Bove writes in a separate note that JPMorgan's unusually tempered outlook belies the reality of its situation. "
The reality is that this was a very bad quarter for JPMorgan Chase," he adds. "Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable."