JPMorgan Banks on Losses During 1st-Quarter Earnings Report

Top US bank misses estimates and takes precautions against credit defaults

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Apr 14, 2020
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On April 14 before the market opened, JPMorgan Chase & Co. reported earnings results for the first quarter of 2020, which ended on March 31.

During the quarter, the largest bank in the U.S. posted reported revenue of $28.3 billion, managed revenue of $29.1 billion, net income of $2.9 billion and 78 cents in earnings per share. Managed revenue was slightly above analyst expectations of $28.97 million, while earnings fell significantly below expectations of $2.49 per share.

Shares are down approximately 2.13% to $96.10 in intraday trading following the news. The market cap is $287.01 billion and the price-earnings ratio is 8.93, which is slightly above the industry median of 8.35.

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Key numbers

The earnings per share miss was largely due to the bank setting aside an extra $6.8 billion in reserve funds in anticipation of a wave of credit and loan defaults. Increasing the reserve funds for credit losses accounted for a loss of $1.99 per share. CEO Jamie Dimon said the following in a statement:

"In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8 billion, resulting in total credit costs of $8.3 billion for the quarter.”

Looking at JPMorgan’s revenue and net income during the past couple of recessions, we can see that the bank saw similar declines in net income in the quarters leading up to turbulent economic conditions.

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Book value was up 6% to $75.88 per share compared to the prior-year quarter, indicating that the total value of the bank’s assets has increased.

Lending has increased significantly, and the average risk of the loan profile is expected to be higher. As of the end of the first quarter, JPMorgan clients drew an additional $50 billion from existing credit lines and $25 billion from new credit extensions. Under the SBA Paycheck Protection Program, the bank has received applications representing $36 billion in loans, $8 billion of which are for businesses with over 600,000 employees. In total, the bank supported the raising of $344 billion in capital and $304 billion in credit during the quarter.

Company outlook

The numbers indicate that JPMorgan expects significant numbers of customers and clients to default on their loans in the near future, an expectation that the company is communicating clearly with both investors and the public.

According to Chief Financial Officer Jennifer Piepszak, JPMorgan estimated a 10% unemployment rate at the close of the first quarter, but it has since upped its forecasts for 20% unemployment and a 40% drop in gross domestic product. To facilitate easier repayment of loans that many will lose the ability to repay, the bank plans to offer a 90-day grace period for credit card, auto and mortgage loans, and it will not report payment deferrals to credit bureaus.

The company withdrew its previous guidance, stating that it would need to wait until unemployment, GDP and interest rates became more normalized before attempting to estimate future earnings.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

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