JPMorgan Chase & Co., the U.S. banking giant, just reported its first-quarter profit and revenue. The earnings per share went down to $0.78, while analysts expected $1.84. It is a steep decline, 69%, from its first-quarter results of 2019.
The largest U.S. bank
JPMorgan Chase is the largest U.S. bank with assets of around $3.1 trillion. Its financial results give us not only a view of what is happening in the U.S. and the banking sector but also a broader view on the economy and the impacts of the COVID-19 pandemic worldwide.
$6.8 billion provision for future loan losses
JPMorgan provisioned $6.8 billion to protect themselves from loan losses. Just a quick reminder, a provision is an amount of money set aside in an organization’s accounts for a known or likely liability. If the economy recovers quickly, this money may be back as profits. However, it is unlikely.
JPMorgan indicated in the past weeks that the results would be horrible. Jamie Dimon, JPMorgan’s CEO confirmed it today:
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.
The added $6.8 billion represents a tiny percentage of JPMorgan’s exposure to the economy. I would not be surprised if, in the next quarter, JPMorgan increases its provisions against loan losses again.
It is essential to decompose the $6.8 billion provision to have a clearer view of the risks banks in general, and the economy overall are facing. Of the $6.8 billion, $4.4 billion or nearly 65% went to their consumer reserve, predominantly against credit card losses. The remaining $2.4 billion are spread across multiple sectors, with the largest being: Oil & Gas, Real Estate, and Consumer & Retail industries.
On a positive note, the high volume of trading boosted the JPMorgan’s total markets revenue which is up 32%.
Impact on investments
In general, the banking sector financial results are highly correlated to the economy. If you believe as JPMorgan does, that a fairly severe recession is looming, it may be too early to buy any banking sector’s stocks. The decomposition of the additional $6.8 billion provision gives us a grim outlook on the economy, with a potential large number of defaults on credit cards, and businesses having difficulties especially in the real estate, retail, and oil & gas sectors.
As always, this post is not intended as investment advice but as an educational post where I express my opinion. If you need any investment advice consult an investment advisor.
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