Macro Wrap – $JPM Kicks Off Financial Earnings

by Enis April 12, 2013 7:48 am • Commentary

By normal valuation metrics, the banking sector looks cheap.  JPM reported a strong $1.59 quarterly earnings number this morning, better than the $1.39 expected.  It did slightly miss revenue estimates ($25.1 bln vs. $25.8 bln expected), but overall, a decent performance to start the year.

Normally, for a 8 P/E name that pays a 3% dividend, any type of beat would be a stellar result. Heck, the bar seems so low to start.  So why is JPM stock trading down 0.5% pre-market on the results, instead of up significantly?

Welcome to the world of U.S. financial stocks.  First and foremost, investors no longer trust the banks’ balance sheets and earnings power.  Every year since the financial crisis, one of the large banks has had to take multi-BILLION dollar losses due to poor risk controls or legal entanglements.  While “recurring” earnings look strong, the banks never seem far from dropping another bomb.

Regulatory scrutiny keeps valuations depressed as well.  Just last week, Senator Sherrod Brown outlined plans to introduce a bill that would require substantially higher capital levels for U.S. banks (a long-overdue measure for systemic health, but negative for bank stocks).  This week, JPM’s own research team put out a note recommending investors stay away from global integrated banks due to potential future breakup risks.

Finally, European banking systemic weakness introduces a tail risk for all global banks like JPM.  A return of counterparty risk concerns if European unity is not maintained is still a risk that must be considered.

Those are the negatives.  What about the positives?  Here are the highlights from JPM’s morning release:

  • In a yield-hungry world, JPM increased its quarterly div to 0.38, and its buyback authorization for the next year is $6 Bln (about 1.50 per share for the next year)
  • Delinquencies and net charge-offs remain near multiyear lows, so JPM released $1.15 billion in loan loss reserves, larger than analysts expected
  • Mortgage Banking was actually weaker than expected, as JPM cited lower margins (likely due to lower rates).  Looks like a lot of the refinancing cycle is over as well.
  • Credit Cards and Auto Loans show good credit quality offset by lower loan balances, so relatively flat.
  • Investment banking results were relatively strong after a good first quarter for capital markets as a whole.  The CIO was a weak spot, but debt markets’ business did well.
  • Commercial loan growth going forward could be weaker than expected despite what Dimon called a healthy and improving economy.

A mixed report overall.  Yet, again, for most companies at JPM’s valuation, a mixed report is a win.  But JPM is no normal company, and financials are not a normal industry.  Wells Fargo, a more straightforward banking business, reports shortly.  The reaction within financials should give a signal for positioning heading into earnings season.