Macro Wrap – $JPM Is Starting to Look Like a Utility

by Enis July 12, 2013 7:46 am • Commentary

JPM just reported earnings that was slightly better than expected.  I just read through the whole report.  I was surprised at the strong performance of the investment bank (given the rapid move higher in rates), and not surprised at the large decrease in allowance for loan losses across multiple businesses, which helped to offset decreasing net interest margins and low loan demand as portfolio runoff continued.

Overall, JPM’s report is a confirmation of improving consumer confidence on the consumption and asset investment fronts, but continued hesitation on business investment.  The stock is currently trading around flat, after trading up, then down in the pre-market.  The reaction is based more often on the composition of earnings rather than the headline (since banks have so many marking levers to move the total earnings result).  Here were the main positives and negatives I saw:


  • The biggest positive for me was the performance of the investment bank, particularly the fixed income side of the business.  As I highlighted in my preview yesterday, a volatile move higher in rates like we saw in the 2nd quarter could have caused some large trading losses if managed poorly.  But JPM traders were clearly nimble, and taking less risk as well.
  • JPM continued to attract industry-leading deposits as clients move money to the safety of one of the largest banks in the country
  • The move higher in the stock market in the 1st half of 2013 has clearly attracted investor interest, as JPM’s private client and institutional investment businesses had stronger than expected inflows and new account openings (fees also helped by higher market values)
  • Credit card sales volume was very robust, reflecting both an increase in market share for Chase Card and higher consumer spending



  • Higher than expected loan loss reserve releases (across all businesses, but led by the improving real estate market) were the main reason for the beat in revenues and earnings – not as desirable as a strong beat due to higher business revenues
  • The rise in interest rates is going to hurt the mortgage origination and refinancing business in the second quarter.  This is an extra stickler because JPM apparently increased headcount in anticipation of continued growth in the mortgage business
  • Loan demand continued to be weak, and portfolio runoff of prior, higher interest rate loans continues to pressure net interest margins.


Overall, JPM’s results paint the portrait of a bank taking on less and less market risk (VaR was near a 5 year low), benefitting from the mark-to-market improvement of its current asset portfolio (primarily through loan loss reserve decreases), but struggling to increase its revenue base in existing businesses.

Increasingly, JPM is starting to look like a utility (better for the financial system, worse for investors looking for earnings growth).  At around 10x P/E though, most investors in JPM are likely of the value variety, happy with the near 3% dividend and cheap valuation even if earnings growth is only 5-10% going forward.  Of course, many others probably stay away given the unanticipated risks of managing such a large balance sheet (as shown by the Whale fiasco last year).