There were four things we mostly cared about in today's JPM earnings release, the first Wall Street bank to report Q4 results:
- how did the company's fixed income and equity trading revenue do;
- what is the bank's credit exposure to energy/oil;
- did the recent Fed hike do anything to boost the company's Net Interest Margin (this has been the primary catalyst for bank share upside), and
- did JPM halt its practice of releasing reserves and start building reserves - a major inflection point when it comes to management expectations for future credit quality deterioration.
But before we go there, here is a quick skim of the summary income statement: as the table below shows, JPM posted a modest $0.13 increase to EPS Y/Y which rose to $1.32, beating estimates of $1.27 driven by a $1.1BN reduction in expenses while revenue increased only $0.2BN from a year ago. One place where the cost-cutting may have come from is headcount as JPM lost 12,000 workers in 2015 and has lost ~43,000 since 2012. However, the biggest hit was in Investment Banking compensation (as in bonus accruals) which dropped by $1.1BN Y/Y to $4.4BN, also down $1.7 billion from the prior quarter. It will not be a happy year for JPM bonus recipients.
Then a quick look at JPM's balance sheet which has continued its recent trend of declining, and was down to $2.352 trillion, down $221 billion from a year ago, while the matching decline on the liability side was once again in deposits which dropped to $1.28 trillion from $1.363 trillion a year ago, while non-operating deposits decline by $200 billion. And while JPM no longer discloses the full breakdown of its Net Interest Margin, it did note that "Firm NII up $310mm QoQ and NIM up 7bps QoQ to 2.23%", adding to "Expect 1Q16 Firmwide NII and NIM to be flat to slightly up sequentially." One would sure hope it is up instead of flat: after all that was the whole point of the Fed rate hike right.
Drilling down on just JPM's income statement, we focus on the most important group, Corporate and Investment bank, where total revenue slumbped by $314MM Y/Y to $7.1 billion mostly as a resulyt of a decline in IB revenue, which at $1.5B, was down 11% YoY "driven by lower debt underwriting fees, partially offset by higher advisory fees." In other words, JPM does not do too well when there is a debt issuance drought.
Then we focus on what until recently was every bank's favorite non-GAAP accounting piggybank: releases from loan loss reserves. Here something changed, because after years of declining loan loss reserves, in Q4, for the first time in many consecutive quarters, JPM increased in loan reserve by $89 million to $13.555 billion.
What drove this increase in reserves? As JPM notes in the earnings presentation, "Credit costs of $81mm primarily reflecting higher reserves driven by Oil & Gas" within the IB group and a "reserve build of ~$100mm driven by $60mm in Oil & Gas and $26mm in Metals & Mining" within the commercial banking group.
The first oil and energy cracks are indeed starting to emerge, further confirmed by Jamie Dimon who said that while JPM had a good quarter as 2015 came to a close, "businesses generated strong loan growth and credit quality, except for some stress in energy." How much stress, exactly, won't be revealed for a few more months.
Until then, we will keep our eye on the other big banks and see if anyone else will crack first and admit just how big their exposure to the foundering oil and energy sector truly is.
The full Q4 JPM presentation is below
http://www.scribd.com/embeds/295436971/content