By Jonathan Chen
After Jamie Dimon went on his little tirade in early June, calling out Ben Bernanke and telling the Fed chair not to heavily regulate banks, Dimon and his team at J.P. Morgan (JPM) delivered exceptionally strong earnings Thursday morning. This may be the "all-clear" sign that the banking sector is looking for, as both revenues and earnings jumped sharply in the second quarter.
Helped by a 49% jump in investment banking, J.P. Morgan reported quarterly earnings of $1.27 per share on $26.78 billion in revenues. Wall Street analysts had been expecting $1.22 per share in earnings on $25 billion in revenues.
In the press release, Dimon said, regarding mortgages, "delinquency and net-charge-off trends improved modestly" from the prior quarter but "net charge-offs remained high and we expect credit losses to remain elevated."
On the conference call, Dimon discussed the bank's exposure to the "PIIGS" (Greece, Portugal, Italy, Ireland, and Spain) - J.P. Morgan has $15 billion worth of "PIIGS" exposure, mostly in corporate exposure. Dimon said the worst case scenario is the New York-based investment bank takes a 20% hit to this exposure, a loss of $3 billion.
Dimon also said that he is happy with the firm's 6.7% capital ratio, despite pressure from regulators to raise the capital ratio. Dimon said he is comfortable with it and is buying back stock as a result.
Despite concerns over regulatory issues such as Dodd-Frank, Basel III and others, J.P. Morgan was still able to boost top-line growth, which has been plaguing the banking system for what seems like forever. Loan demand is still sluggish, and banks are wary about lending because of the regulatory uncertainty facing them.
The company also said that credit-loss provisions were $1.81 billion, down from $3.36 billion last year, but up from the $1.17 billion in the last quarter.
This earnings report from J.P. Morgan could potentially be the all-clear signal that the banking system has longed for for so long.
Traders who believe that the banking system is about to experience a major turn around might want to consider the following trades:
- Going long names like Goldman Sachs (GS) could prove exceptionally profitable, as shares of Goldman have beaten down sharply, and are trading near 52 week lows.
- Another name to consider is Citigroup (C), which has finally started to turn around the albatross that the bank has been for years. It is trading well below book value of nearly $59 per share.
- Another name to consider is Lazard Freres (LAZ), especially on the back of strong investment-banking revenues from J.P. Morgan.
Traders who believe that the banking system will continue to flounder may consider alternate positions:
- Shorting Bank of America (BAC) could prove profitable, as the housing sector continues to have worries, and Countrywide Financial still weighs heavily on BofA.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.