At the same time that JPMorgan Chase & Co. posted a record profit and smashed analysts’ rosiest expectations, Chief Executive Officer Jamie Dimon was actively working to dial back expectations.
The biggest U.S. bank set the tone for the rest of Wall Street on Friday by reporting fourth-quarter earnings per share of $3.79, up from $2.57 a year earlier and easily topping estimates that ranged from $1.91 to $2.91. Profit surged 42% to $12.1 billion; analysts expected a 4% drop. JPMorgan’s trading division brought in $5.9 billion in the final three months of 2020, up 20% from a year earlier, which was in line with Dimon’s guidance in December. Corporate and investment banking fees soared 34%. Investors would be forgiven for growing numb to these figures — it just feels like business as usual for JPMorgan.
The unexpected twist that practically no one saw coming was JPMorgan’s huge release of reserves. The bank reported a $1.89 billion recovery of credit losses, while analysts had predicted an additional provision of $1.39 billion. All told, the bank’s total allowance for credit losses, which includes loans and commitments, fell by $2.9 billion from the previous quarter, to $30.7 billion. About $2 billion of that release came from wholesale, with the other $900 million from the residential mortgage business. That’s almost $3 billion injected straight into JPMorgan’s bottom line.
Dimon’s statement accompanying the results is telling. He couldn’t go two sentences without making clear that investors shouldn’t necessarily count on such a profit windfall in the coming quarters:
“JPMorgan Chase reported strong results in the fourth quarter of 2020, concluding a challenging year where we generated record revenue, benefiting from our diversified business model and dedicated employees. While we reported record profits of $12.1 billion, we do not consider the reserve takedown of $2.9 billion to represent core or recurring profits – essentially reserve calculations, while done extremely diligently and carefully, now involve multiple, multi-year hypothetical probability-adjusted scenarios, which may or may not occur and which can be expected to introduce quarterly volatility in our reserves. While positive vaccine and stimulus developments contributed to these reserve releases this quarter, our credit reserves of over $30 billion continue to reflect significant near-term economic uncertainty and will allow us to withstand an economic environment far worse than the current base forecasts by most economists.”
Reserve releases will also take on added importance in a year that looks to be much more challenging for pre-provision income. After a blockbuster year for trading — Chief Financial Officer Jennifer Piepszak referred to the “extraordinary performance” of markets in an analyst call — it stands to reason that fixed-income and equity traders across Wall Street will generate less revenue in 2021. Even though the Treasury yield curve has steepened in recent months, net interest income looks as if it will be flat: JPMorgan expects NII to reach $55.5 billion in 2021, compared with $55 billion in the 2020 fiscal year. And the bank sees higher costs in 2021, driven by investments in technology, marketing, front-office hiring and market expansion. That should pay off in the long term — Dimon called investments “the best and possibly highest use of our capital” — but it will immediately pressure this year’s results.
Given all those headwinds, a cynic might say JPMorgan and other banks will simply tweak their provisions for credit losses as needed to keep the numbers up. Some analysts assumed that Wall Street was conservative on setting aside reserves last year because they could afford to, given the surge in trading revenue because of financial-market volatility. So the flip side would be releasing those funds as the economy gets closer to a return to normal — and, as it so happens, as trading revenue likely returns to Earth.
Citigroup Inc.’s fourth-quarter earnings already showed clear signs of a fading wave of investor activity, with the bank’s traders generating $3.09 billion, lower than the $3.2 billion projected by analysts. Trading revenue increased 7% from a year earlier, the smallest move higher since the Covid-19 pandemic caused markets to tumble.
Citigroup, for its part, also released $1.5 billion of reserves for potential losses on loans, which was a large reason the bank still managed to top estimates for net income. The same goes for Wells Fargo & Co., which released $763 million of loan-loss reserves in the fourth quarter, allowing it to overcome worse-than-expected expenses and more than $1 billion of charges for restructuring and addressing old account scandals to post net income of $2.99 billion, enough to exceed the $2.9 billion analysts expected.
On an analyst call, Dimon emphatically rejected the idea that releasing reserves are earnings. “We do not consider taking down reserves recurring or normal income — we don’t do it to show a profit, we don’t consider it a profit. It’s ink on paper,” he said. Next quarter, for instance, if card reserves come down, “we’re not going to be sitting here cheering about that. We’re cheering that America is doing better, but we don’t consider that earnings.”
Certainly, there was a lot for JPMorgan investors to be cheery about in 2020, and there’s reason for optimism in 2021, including the resumption of share buybacks. But it looks as if all of Wall Street’s earnings this year will come with a big catch.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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January 19, 2021 at 09:09AM
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JPMorgan's $3 Billion Profit Booster Comes With a Catch - Crain's Chicago Business
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