This morning JPMorgan Chase (JPM) reported a “surprise” jump in earnings in the third quarter.
The problems in that “surprise” were in the nature of the surprise. A good part of the “surprise” wasn’t a surprise. The bank reported a 30% increase in revenue from its trading unit. That was exactly the same “surprise” as last quarter and was widely anticipated on Wall Street. The other “surprise” was a surprise as the bank cut its reserves for credit losses by $569 million after adding $20 billion to its loan loss reserves in the first half of the year. Write downs offs on bad loans were actually down from the third quarter of 2019. But credit reserves are still a whopping $34 billion so a reduction of $539 million is really a wave at a belief that consumers are holding up better than expected rather than an rousing endorsement of the view that the economy is getting better quickly. More than half the consumer loans that were in payment deferral at the end of the second quarter have exited those deferral plans. About 92% of accounts that came out of deferral programs are current on their payments.
But consumers, the economy, and the bank aren’t out of the woods yet. The bank said it is still expected losses in its consumer loan portfolio–but that they won’t show up until the second half of 2021. That’s later than JPMorgan Chase had initially forecast.
Going into today’s earnings, shares of JPMorgan Chase were down 27% for 2020. Today the stock was down 1.66% at the close.
Third quarter earnings of $2.92 a share easily beat estimates of $2.35 a share and the whisper number of $2.47 a share. Revenue also beat but by less with $29.94 billion versus projections of $28.63 billion.
And there’s the problem for stocks as a whole. Earnings at JPMorgan Chase were up big on trading and a decision to cut its loan loss reserves for consumer loans. Those aren’t items available to non-bank companies And the bank’s relatively modest beat on revenue and its uncertainty looking into 2021 won’t set hearts aflutter considering that once again stocks are trading as historic highs.
Nor will the bank’s view that credit losses have been lower than forecast due to coronavirus stimulus payments and that credit losses can be expected to rise as those stimulus payments expire.
At the close today the Standard & Poor’s 500 was down 0.64% and the Dow Jones Industrial Average was off 0.55%. The NASDAQ Composite nudged lower by 0.10% and the small cap Russell 2000 gave up 0.52%