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JPM Beats Expectations On Record Trading Revenue As Credit Loss Charges Soar Above $10BN

JPM Beats Expectations On Record Trading Revenue As Credit Loss Charges Soar Above $10BN

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JPM Beats Expectations On Record Trading Revenue As Credit Loss Charges Soar Above $10BN Tyler Durden Tue, 07/14/2020 - 07:39

JPM has officially launched Q2 earnings season, with what was essentially a story of an impressive Income Statement vs a rather ugly Balance sheet.

Looking at the income statement first, JPM reported Q2 revenue of $33.8BN, up $4.3BN Y/Y, and smashing expectations of $30.3BN, largely as a result of a surge in trading and IBanking revenue, offset by a higher than expected credit loss provision. Indeed, despite the surge in revenue, net Interest income was actually down $0.6BN Y/Y to $14 billion as the bank's net interest margin continues to be depressed. Still, the bank reported EPS of $1.38, which while down $1.44 from the $2.88 a year ago, was also stronger than the $1.01 expected. Why the nearly $5 billion drop in Net Income? Because JPM continued to aggressively build loan loss reserves ahead of what is shaping up to be the worst financial crisis since Lehman (more below).

How did JPM manage such an impressive Q2 revenue recovery? Simple: the refi flood started by covid, and with the explicit guarantee of Powell, allowed JPM to unleashed a record amount of debt and equity issuance, even as M&A slowed sharply in the quarter.

Meanwhile, despite the slowdown in debt and credit card sales volumes, these have almost normalized, while mortgage and auto applications have soared in recent weeks to take advantage of near record low interest rates. Of note: in June, JPMorgan recorded the highest auto loan origination volume in its history in June, originating a record $3.7 billion of auto loans.

JPM also tried to deflect criticism for its disappointing participation in the PPP Program, claiming that "since March 13th, we’ve provided assistance to nearly 1.7mm accounts, representing $79B2 of balances" and adding that "a large share of customers continue to pay us through the relief period"

Yet for all the pretty charts and slides, the only one that really matters was the bank's corporate and investment bank, where JPM reported a staggering 85% increase in net income to $5.5BN, while revenue exploded a whopping 66% higher to a record $16.4 BN.

What was behind this surge:

  • Markets revenue of $9.7B, up 79% YoY, of which Fixed Income Markets revenue of $7.3B, up 99% YoY, while Equity Markets revenue of $2.4B, up 38%, predominantly driven by strong client activity in derivatives and Cash Equities
  • Investment Banking revenue of $3.4B, up 91% YoY with IB fees up 54%, reflecting higher fees across products (the number included $659mm of markups on HFS positions in the bridge book).
  • While far less relevant, Q2 banking expense were $6.8B, up 19% YoY "driven by higher revenue-related expense"

Putting the fixed income trading revenue in context, it rose to a record $7.34BN, as the Fed backstoped all debt capital markets, providing an effective subsidy to JPM. But we are about to listen to Jamie Dimon lecture us again how JPM did not need the Fed again, like in 2009

What we also found especially remarkable, was the surge in JPM VaR from $44 a year ago to a record $127 in Q2.

So all of that was the good news. What was not so good? Well, as we warned last quarter, JPM did not provision nearly enough in potential credit losses, and sure enough moments ago we got confirmation of that, when the bank reported $10.5BN in credit loss provisions (consisting of $1.6BN in net charge offs and $8.9BN in reserve build), a sharp increase from the $8.3 billion in Q1.

A detailed breakdown of Q2 reserve builds is below:

This meant that Net Income for the bank's Consumer and Community bank tumbled by $4.3BN, largely offsetting the gains in trading. Indeed, as JPM reports, credit costs in its consumer bank division soared $4.7BN Y/Y to $5.8B, reflecting reserve builds in:

  • Card: $2.9B
  • Home Lending: $900mm
  • CBB: $490mm
  • Auto: $310mm

Some more unpleasant numbers: average loans were down 7 YoY, while average deposits soared 20%. This is money that should be in the market - at least according to the Fed - but instead it is collecting electronic dust in JPM's digital vault.

Overall lending was up 2% year-on-year, to about $979 billion, and was as a result of a 9% jump in wholesale loans to about $528 billion, even as total consumer loans fell 2% to about $309 billion, while credit card loans dropped 10% to about $142 billion as consumers paid back loans aggressively.

That said, there was a silver lining in that JPMorgan’s revenue from home mortgage lending jumped 51% to $1.7 billion thanks to higher margins as the gap between the 10Y TSY and the 30Y mortgage is near all time wides.

Despite the impressive top-line beat, Dimon sounded rather cautious in his prepared comments:

"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."

That said, should the worst case scenario come to pass, Dimon is confident it has enough capital to offset even more losses:

“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.”

And in a world where virtue signaling is now expected, JPMorgan didn't disappoint, with Dimona hilariously claiming that his bank - which was dragged kicking and screaming into the PPP program - helping to drive "policies and programs for the benefit of all society."

"We are fully committed to doing our part both in promoting the safety of our employees and customers and helping the economies of the world recover from the impact of the ongoing COVID-19 crisis, including helping to drive policies and programs for the benefit of all of society and create opportunity for those who have been left out of the economy for far too long."

Looking ahead, JPM provided the following outlook:

  • FY2020 net interest income to be ~$56B, below the $56.39BN expected.
  • FY2020 adjusted expense of ~$65B

In short, everything can change depending on whether the US economy is shutdown again because of covid, and as many democratic states have hinted, that's precisely what is coming ahead of the Nov 3 presidential election.

Commenting on the results, Bloomberg's Michelle Davis writes:

The biggest U.S. bank said second-quarter profit fell 51% to $4.69 billion, a smaller drop than forecast, as record trading revenue helped counter the biggest loan-loss provision in the firm’s history. It’s the second consecutive quarter that trading set a record, as the bank’s Wall Street unit is helping prop up a consumer-lending division struggling with business closures and swelling unemployment rolls.

In response to the earnings, the stock surged initially, likely boosted by the strong read of trading revenue, which however then faded as attention turned to the balance sheet.

Full Q2 presentation below:

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International

Copper Soars, Iron Ore Tumbles As Goldman Says “Copper’s Time Is Now”

Copper Soars, Iron Ore Tumbles As Goldman Says "Copper’s Time Is Now"

After languishing for the past two years in a tight range despite recurring…

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Copper Soars, Iron Ore Tumbles As Goldman Says "Copper's Time Is Now"

After languishing for the past two years in a tight range despite recurring speculation about declining global supply, copper has finally broken out, surging to the highest price in the past year, just shy of $9,000 a ton as supply cuts hit the market; At the same time the price of the world's "other" most important mined commodity has diverged, as iron ore has tumbled amid growing demand headwinds out of China's comatose housing sector where not even ghost cities are being built any more.

Copper surged almost 5% this week, ending a months-long spell of inertia, as investors focused on risks to supply at various global mines and smelters. As Bloomberg adds, traders also warmed to the idea that the worst of a global downturn is in the past, particularly for metals like copper that are increasingly used in electric vehicles and renewables.

Yet the commodity crash of recent years is hardly over, as signs of the headwinds in traditional industrial sectors are still all too obvious in the iron ore market, where futures fell below $100 a ton for the first time in seven months on Friday as investors bet that China’s years-long property crisis will run through 2024, keeping a lid on demand.

Indeed, while the mood surrounding copper has turned almost euphoric, sentiment on iron ore has soured since the conclusion of the latest National People’s Congress in Beijing, where the CCP set a 5% goal for economic growth, but offered few new measures that would boost infrastructure or other construction-intensive sectors.

As a result, the main steelmaking ingredient has shed more than 30% since early January as hopes of a meaningful revival in construction activity faded. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports. The latest drop will embolden those who believe that the effects of President Xi Jinping’s property crackdown still have significant room to run, and that last year’s rally in iron ore may have been a false dawn.

Meanwhile, as Bloomberg notes, on Friday there were fresh signs that weakness in China’s industrial economy is hitting the copper market too, with stockpiles tracked by the Shanghai Futures Exchange surging to the highest level since the early days of the pandemic. The hope is that headwinds in traditional industrial areas will be offset by an ongoing surge in usage in electric vehicles and renewables.

And while industrial conditions in Europe and the US also look soft, there’s growing optimism about copper usage in India, where rising investment has helped fuel blowout growth rates of more than 8% — making it the fastest-growing major economy.

In any case, with the demand side of the equation still questionable, the main catalyst behind copper’s powerful rally is an unexpected tightening in global mine supplies, driven mainly by last year’s closure of a giant mine in Panama (discussed here), but there are also growing worries about output in Zambia, which is facing an El Niño-induced power crisis.

On Wednesday, copper prices jumped on huge volumes after smelters in China held a crisis meeting on how to cope with a sharp drop in processing fees following disruptions to supplies of mined ore. The group stopped short of coordinated production cuts, but pledged to re-arrange maintenance work, reduce runs and delay the startup of new projects. In the coming weeks investors will be watching Shanghai exchange inventories closely to gauge both the strength of demand and the extent of any capacity curtailments.

“The increase in SHFE stockpiles has been bigger than we’d anticipated, but we expect to see them coming down over the next few weeks,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said by phone. “If the pace of the inventory builds doesn’t start to slow, investors will start to question whether smelters are actually cutting and whether the impact of weak construction activity is starting to weigh more heavily on the market.”

* * *

Few have been as happy with the recent surge in copper prices as Goldman's commodity team, where copper has long been a preferred trade (even if it may have cost the former team head Jeff Currie his job due to his unbridled enthusiasm for copper in the past two years which saw many hedge fund clients suffer major losses).

As Goldman's Nicholas Snowdon writes in a note titled "Copper's time is now" (available to pro subscribers in the usual place)...

... there has been a "turn in the industrial cycle." Specifically according to the Goldman analyst, after a prolonged downturn, "incremental evidence now points to a bottoming out in the industrial cycle, with the global manufacturing PMI in expansion for the first time since September 2022." As a result, Goldman now expects copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25.’

Here are the details:

Previous inflexions in global manufacturing cycles have been associated with subsequent sustained industrial metals upside, with copper and aluminium rising on average 25% and 9% over the next 12 months. Whilst seasonal surpluses have so far limited a tightening alignment at a micro level, we expect deficit inflexions to play out from quarter end, particularly for metals with severe supply binds. Supplemented by the influence of anticipated Fed easing ahead in a non-recessionary growth setting, another historically positive performance factor for metals, this should support further upside ahead with copper the headline act in this regard.

Goldman then turns to what it calls China's "green policy put":

Much of the recent focus on the “Two Sessions” event centred on the lack of significant broad stimulus, and in particular the limited property support. In our view it would be wrong – just as in 2022 and 2023 – to assume that this will result in weak onshore metals demand. Beijing’s emphasis on rapid growth in the metals intensive green economy, as an offset to property declines, continues to act as a policy put for green metals demand. After last year’s strong trends, evidence year-to-date is again supportive with aluminium and copper apparent demand rising 17% and 12% y/y respectively. Moreover, the potential for a ‘cash for clunkers’ initiative could provide meaningful right tail risk to that healthy demand base case. Yet there are also clear metal losers in this divergent policy setting, with ongoing pressure on property related steel demand generating recent sharp iron ore downside.

Meanwhile, Snowdon believes that the driver behind Goldman's long-running bullish view on copper - a global supply shock - continues:

Copper’s supply shock progresses. The metal with most significant upside potential is copper, in our view. The supply shock which began with aggressive concentrate destocking and then sharp mine supply downgrades last year, has now advanced to an increasing bind on metal production, as reflected in this week's China smelter supply rationing signal. With continued positive momentum in China's copper demand, a healthy refined import trend should generate a substantial ex-China refined deficit this year. With LME stocks having halved from Q4 peak, China’s imminent seasonal demand inflection should accelerate a path into extreme tightness by H2. Structural supply underinvestment, best reflected in peak mine supply we expect next year, implies that demand destruction will need to be the persistent solver on scarcity, an effect requiring substantially higher pricing than current, in our view. In this context, we maintain our view that the copper price will surge into next year (GSe 2025 $15,000/t average), expecting copper to rise to $10,000/t by year-end and then $12,000/t by end of Q1-25’

Another reason why Goldman is doubling down on its bullish copper outlook: gold.

The sharp rally in gold price since the beginning of March has ended the period of consolidation that had been present since late December. Whilst the initial catalyst for the break higher came from a (gold) supportive turn in US data and real rates, the move has been significantly amplified by short term systematic buying, which suggests less sticky upside. In this context, we expect gold to consolidate for now, with our economists near term view on rates and the dollar suggesting limited near-term catalysts for further upside momentum. Yet, a substantive retracement lower will also likely be limited by resilience in physical buying channels. Nonetheless, in the midterm we continue to hold a constructive view on gold underpinned by persistent strength in EM demand as well as eventual Fed easing, which should crucially reactivate the largely for now dormant ETF buying channel. In this context, we increase our average gold price forecast for 2024 from $2,090/toz to $2,180/toz, targeting a move to $2,300/toz by year-end.

Much more in the full Goldman note available to pro subs.

Tyler Durden Fri, 03/15/2024 - 14:25

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Government

Moderna turns the spotlight on long Covid with new initiatives

Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital…

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Moderna’s latest Covid effort addresses the often-overlooked chronic condition of long Covid — and encourages vaccination to reduce risks. A digital campaign debuted Friday along with a co-sponsored event in Detroit offering free CT scans, which will also be used in ongoing long Covid research.

In a new video, a young woman describes her three-year battle with long Covid, which includes losing her job, coping with multiple debilitating symptoms and dealing with the negative effects on her family. She ends by saying, “The only way to prevent long Covid is to not get Covid” along with an on-screen message about where to find Covid-19 vaccines through the vaccines.gov website.

Kate Cronin

“Last season we saw people would get a flu shot, but they didn’t always get a Covid shot,” said Moderna’s Chief Brand Officer Kate Cronin. “People should get their flu shot, but they should also get their Covid shot. There’s no risk of long flu, but there is the risk of long-term effects of Covid.”

It’s Moderna’s “first effort to really sound the alarm,” she said, and the debut coincides with the second annual Long Covid Awareness Day.

An estimated 17.6 million Americans are living with long Covid, according to the latest CDC data. About four million of them are out of work because of the condition, resulting in an estimated $170 billion in lost wages.

While HHS anted up $45 million in grants last year to expand long Covid support initiatives along with public health campaigns, the condition is still often ignored and underfunded.

“It’s not just about the initial infection of Covid, but also if you get it multiple times, your risks goes up significantly,” Cronin said. “It’s important that people understand that.”

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Government

Consequences Minus Truth

Consequences Minus Truth

Authored by James Howard Kunstler via Kunstler.com,

“People crave trust in others, because God is found there.”

-…

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Consequences Minus Truth

Authored by James Howard Kunstler via Kunstler.com,

“People crave trust in others, because God is found there.”

- Dom de Bailleul

The rewards of civilization have come to seem rather trashy in these bleak days of late empire; so, why even bother pretending to be civilized? This appears to be the ethos driving our politics and culture now. But driving us where? Why, to a spectacular sort of crack-up, and at warp speed, compared to the more leisurely breakdown of past societies that arrived at a similar inflection point where Murphy’s Law replaced the rule of law.

The US Military Academy at West point decided to “upgrade” its mission statement this week by deleting the phrase Duty, Honor, Country that summarized its essential moral orientation. They replaced it with an oblique reference to “Army Values,” without spelling out what these values are, exactly, which could range from “embrace the suck” to “charlie foxtrot” to “FUBAR” — all neatly applicable to our country’s current state of perplexity and dread.

Are you feeling more confident that the US military can competently defend our country? Probably more like the opposite, because the manipulation of language is being used deliberately to turn our country inside-out and upside-down. At this point we probably could not successfully pacify a Caribbean island if we had to, and you’ve got to wonder what might happen if we have to contend with countless hostile subversive cadres who have slipped across the border with the estimated nine-million others ushered in by the government’s welcome wagon.

Momentous events await. This Monday, the Supreme Court will entertain oral arguments on the case Missouri, et al. v. Joseph R. Biden, Jr., et al. The integrity of the First Amendment hinges on the decision. Do we have freedom of speech as set forth in the Constitution? Or is it conditional on how government officials feel about some set of circumstances? At issue specifically is the government’s conduct in coercing social media companies to censor opinion in order to suppress so-called “vaccine hesitancy” and to manipulate public debate in the 2020 election. Government lawyers have argued that they were merely “communicating” with Twitter, Facebook, Google, and others about “public health disinformation and election conspiracies.”

You can reasonably suppose that this was our government’s effort to disable the truth, especially as it conflicted with its own policy and activities — from supporting BLM riots to enabling election fraud to mandating dubious vaccines. Former employees of the FBI and the CIA were directly implanted in social media companies to oversee the carrying-out of censorship orders from their old headquarters. The former general counsel (top lawyer) for the FBI, James Baker, slid unnoticed into the general counsel seat at Twitter until Elon Musk bought the company late in 2022 and flushed him out. The so-called Twitter Files uncovered by indy reporters Matt Taibbi, Michael Shellenberger, and others, produced reams of emails from FBI officials nagging Twitter execs to de-platform people and bury their dissent. You can be sure these were threats, not mere suggestions.

One of the plaintiffs joined to Missouri v. Biden is Dr. Martin Kulldorff, a biostatistician and professor at the Harvard Medical School, who opposed Covid-19 lockdowns and vaccine mandates. He was one of the authors of the open letter called The Great Barrington Declaration (October, 2020) that articulated informed medical dissent for a bamboozled public. He was fired from his job at Harvard just this past week for continuing his refusal to take the vaccine. Harvard remains among a handful of institutions that still require it, despite massive evidence that it is ineffective and hazardous. Like West Point, maybe Harvard should ditch its motto, Veritas, Latin for “truth.”

A society hostile to truth can’t possibly remain civilized, because it will also be hostile to reality. That appears to be the disposition of the people running things in the USA these days. The problem, of course, is that this is not a reality-optional world, despite the wishes of many Americans (and other peoples of Western Civ) who wish it would be.

Next up for us will be “Joe Biden’s” attempt to complete the bankruptcy of our country with $7.3-trillion proposed budget, 20 percent over the previous years spending, based on a $5-billion tax increase. Good luck making that work. New York City alone is faced with paying $387 a day for food and shelter for each of an estimated 64,800 illegal immigrants, which amounts to $9.15-billion a year. The money doesn’t exist, of course. New York can thank “Joe Biden’s” executive agencies for sticking them with this unbearable burden. It will be the end of New York City. There will be no money left for public services or cultural institutions. That’s the reality and that’s the truth.

A financial crack-up is probably the only thing short of all-out war that will get the public’s attention at this point. I wouldn’t be at all surprised if it happened next week. Historians of the future, stir-frying crickets and fiddleheads over their campfires will marvel at America’s terminal act of gluttony: managing to eat itself alive.

*  *  *

Support his blog by visiting Jim’s Patreon Page or Substack

Tyler Durden Fri, 03/15/2024 - 14:05

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