JPMorgan Chase said Thursday that second-quarter profit fell as the bank built up bad loan provisions by $428 million and suspended share buybacks.
The actions reflect an increasingly cautious stance by Chairman and CEO Jamie Dimon. “The U.S. economy continues to grow, and both the labor market and consumer spending, as well as their ability to spend, remain healthy,” he said in the earnings release.
“However, geopolitical tension, high inflation, declining consumer confidence, uncertainty about how high interest rates and quantitative tightening should fare and their effects on global liquidity, combined with the war in Ukraine and its damaging effects on global energy and food prices are very likely to have a negative impact on the global economy at some point down the road,” he warned.
With that in mind, JPMorgan opted to “temporarily” suspend its share buybacks to help it meet regulatory capital requirements, a prospect that analysts had feared earlier this year. Last month, the bank was forced to keep its dividend unchanged while rivals raised their payouts.
JPMorgan shares fell nearly 5% in Thursday trading, hitting a new 52-week low.
Here’s what the company reported compared to what Wall Street expected, based on a survey of analysts by Refinitiv:
- Earnings per share: $2.76 vs. $2.88 expected
- Revenue under management: $31.63 billion vs. $31.95 billion expected
Profit fell 28 percent from a year earlier to $8.65 billion, or $2.76 a share, mainly due to the build-up of reserves, New York-based JPMorgan said in a statement. A year ago, the bank benefited from releasing $3 billion in reserves.
Management income rose 1 percent to $31.63 billion, helped by a headwind from higher interest rates, but still came in below analysts’ expectations, according to research by Refinitiv. It was just the second time JPMorgan has missed both profit and revenue since 2020.
The bank’s profit loss “isn’t terrible” because non-Wall Street operations performed well as deposits grew and borrowers continued to repay debt, Wells Fargo analyst Mike Mayo said in a research note. But it would be more pleasing if the bank lowered its spending guidelines, he added.
JPMorgan, the largest U.S. bank by assets, is being watched closely for signs of the banking industry’s path during a quarter marked by conflicting trends. On the one hand, unemployment levels remained low, meaning that consumers and businesses had little difficulty repaying loans. Rising interest rates and loan growth mean banks’ core lending business is becoming more profitable. And volatility in financial markets has been a boon for fixed income traders.
But analysts have started to cut estimates for the industry’s earnings amid concern about an impending recession, and most major bank stocks have sunk to 52-week lows in recent weeks. Income from capital markets and mortgage businesses have fallen sharply, and companies are disclosing write-downs amid a broad decline in financial assets.
Importantly, a headwind the industry enjoyed a year ago – reserve releases as loans performed better than expected – has begun to reverse as banks are forced to set aside money for potential defaults as the risk of a recession rises.
The bank had a $1.1 billion provision for credit losses in the quarter, including $428 million in provisions and $657 million in net loan charges for impaired debt. JPMorgan said it added to its reserves because of a “modest deterioration” in its financial outlook.
In April, JPMorgan was the first among banks to begin setting aside funds for loan losses, taking a $902 million charge to build credit reserves in the quarter. This aligns with the more cautious perspective expressed by Dimon. In early June he warned that an economic “hurricane” was approaching.
Asked Thursday to update his forecast, Dimon told reporters on a conference call that nothing had changed, but concerns had settled and some of the economic disruptions he feared were beginning to materialize.
The slowdown in Wall Street deals has stung JPMorgan, which has one of the biggest businesses on the street. Investment banking fees plunged 54% to $1.65 billion, $250 million below the $1.9 billion estimate. Revenue in this segment was impacted by a $257 million reduction in positions held in the company’s bridge loan portfolio.
Fixed income trading revenue jumped 15% to $4.71 billion, but was well below analysts’ estimate of $5.14 billion for the quarter, as strong results in macro trading were offset by weakness in credit and securitized products. Equity trading revenue also rose 15% to $3.08 billion, beating estimates of $2.96 billion.
It was the bank’s second-best quarter ever in trading revenue, Wall Street chief Daniel Pinto told employees in a memo after the results were released.
A tailwind the company has is rising interest rates in the US and a bulging loan portfolio. Net interest income rose 19% to $15.2 billion for the quarter, beating analysts’ estimates of $14.98 billion.
JPMorgan said at the firm’s investor day in May that it could hit a key return target of 17% this year, earlier than expected, thanks to higher interest rates. In fact, the bank reached that level this quarter.
JPMorgan shares have fallen 29% this year through Wednesday, worse than the 19% drop in the KBW Bank index.
Morgan Stanley also reported earnings on Thursday, and like JPMorgan, its results fell short of Wall Street expectations. The bank was hit by falling investment banking revenue.
Wells Fargo and Citigroup are expected to report results on Friday, and Bank of America and Goldman Sachs are scheduled for Monday.
JPMorgan (JPM) Q2 2022 Earnings Missing
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