As the banking sector came under pressure following the collapse of Silicon Valley Bank (SVB), markets have been looking toward the start of the financial reporting season to provide some form of an outlook.
Is the banking sector in crisis? Is this really different from 2008?
JP Morgan’s earnings release and subsequent earnings call on 14 April 2023 provided some answers – and the shares responded with a rise of more than 7.5% on the day.
Revenues rise by 25%, driven by new account openings
When market volatility increases, investors become more defensive and rebalance toward quality. The world of saving and borrowing is not so different. JP Morgan has been a major beneficiary of the SV-induced turmoil in the banking sector.
CFO Jeremy Barnum explained that JP Morgan (NYSE:JPM) experienced significant new account openings across deposits and money market inflows. These were most significant in Commercial Banking, Business Banking, and Asset and Wealth Management.
Deposit inflows reversed from a fall of 3% to an increase of 2% during the quarter, and JPM estimated that $50 billion of these have been retained.
Credit and debit card spending increased by 10% year-on-year, reflecting strong consumer spending.
As net interest income grew by 78% compared to Q1 2022, to hit $9.2 billion in Q1 2023, total revenues increase by $7.7 billion, or 25%, year-on-year, to $39.3 billion.
Income up strongly ─ diversification is paying dividends
JPM reported net income of $12.6 billion for the quarter. This equates to EPS of $4.10, an increase of 56% on the $2.63 reported in the comparable quarter in 2022, and around 20% above the consensus expectation of market analysts. Significantly, these earnings benefited from good results almost across the spectrum of its portfolio of business sectors. Highlights include:
- Corporate Client Banking, which contributed net income of $5.2 billion on revenue of $16.5 billion (up 35% year-on-year)
- Banking and Wealth Management, which saw its revenues increase by 67% year-on-year
- In Card Services and Auto, where revenue was up 14% year-on-year
- Credit card spending, which was up 13% year-on-year
- The Corporate and Investment Banking business delivered net income of $4.4 billion on revenues of $13.6 billion, though Investment Banking revenues fell by 24% year-on-year to $1.6 billion
- In the Markets divisions, total revenue decreased by 4% to $8.4 billion
- Commercial Banking reported a rise of 46% on revenue year-on-year, resulting in net income of $1.3 billion – and investment banking revenues of $881 million increase by 21% year-on-year, thanks to increased M&A and bond underwriting
- Asset and Wealth Management reported a net income of $1.4 billion on revenues of $4.8 billion (up 11% year-on-year)
The bank is being conservative in its approach
Rising interest rates – which were a significant factor behind the demise of SVB – have certainly helped JPM’s financial performance. They have helped to push JPM’s revenues to a quarterly record. But with high-interest rates comes an increased risk of default on loans made by JPM.
It’s refreshing to hear that JPM are preparing for the worst while hoping for the best.
Chairman and CEO James Dimon said:
“We’ve been quite cautious on interest rates for quite a while, and how we invest in our portfolio, what our expectations are, our stress testing… I always looked at rates going up and being prepared whether or not anything is going to happen. So, we’ve been quite conservative ourselves. And we don’t mind continuing to do that because I remind people that having excess capital, you haven’t lost it. It’s kind of earnings in store. You get to deploy it later and maybe at a more opportune time when the time comes.”
He went on to add:
“This crisis is not ’08. It will pass. And the one thing I pointed out is that when I answered the question just before about interest rates, people need to be prepared. They shouldn’t pray that they don’t go up. They should prepare for them going up. And if it doesn’t happen, serendipity.”
JPM has increased the money it has set aside for potential defaults to $2.3 billion. It is prepared. But if rates don’t rise, and this level of defaults is not realized – serendipity, that will be reflected in net income.
The conservative approach includes keeping an eye on how JPM’s business could be affected by inflation remaining higher for longer, global geopolitical tensions, and further quantitative tightening.
JPM will continue to invest in its business.
CFO Jeremy Barnum concluded his presentation by saying:
“To wrap up, our strong results this quarter once again highlight the earnings power of this diversified franchise. We have benefited from our fortress principles and commitment to invest, which we will continue to do as we head into an increasingly uncertain environment.”
The question is, then, should investors buy JPM shares in an increasingly uncertain environment?
On the earnings call, JPM executives discussed the recessionary risk, and the potential for inflation to be stickier than currently assumed. Other details included:
- Jamie Dimon does not expect a credit crunch, though believes tightening will affect (mostly) real estate markets.
- It is factoring in unemployment of 5.8% (up from around 3.5% reported at the end of March).
- They are also taking the view that deposits that came in during the latter part of the quarter may not stick.
In the quarter, JPM returned to repurchasing shares, and returning a total of around $1.9 billion worth. It has announced its intentions to continue doing so throughout 2023 – and has penciled in around $12 billion for this. However, it is being flexible in this regard: it would rather keep its powder dry and retain its capital to maintain business quality and stability.
In summary, JPM are heading into the future with a cautious and conservative approach. But this doesn’t mean income investors need to be cautious about holding JPM shares in a diversified portfolio. Indeed, JPM’s cautious approach may be the prompt to buy JPM shares.
JPM shares currently offer a dividend yield of 2.90%, with a dividend payout ratio of only 29.50%. With shares treading on a PE ratio of only 10.24, JPM’s cautious strategy could yield a higher return than the market currently anticipates.