JPMorgan Chase: Not As Bad As Expected, But Is That Expected?

| About: JPMorgan Chase (JPM)

Summary

JPMorgan Chase reported earnings for the first quarter that were better than analysts had expected, but this is the fifth quarter in a row this has happened.

Revenues were down, year over year, a result primarily from the investment banking and trading areas, although the basic banking business suffers from low interest rates.

Return on shareholder equity was down, year over year, with the expectation that the ROE for the year will also trail the performance from 2015, which was nothing really great.

Reported earnings for JPMorgan, Chase & Co. (NYSE:JPM) fell to $5.54 billion in the first quarter of 2016, down from $5.91 billion in the first quarter of 2015.

Overall revenues fell by 3 percent year-over-year, while profits fell by profits fell by 7 percent.

The good news is that the declines were not as great as expected.

But, as Jamie Dimon, chairman and chief executive officer, described the numbers as "'solid' and evidence of the bank's ability to 'deliver consistently' for its clients and shareholders."

To this quote, however, Ben Mclannahan adds, in the Financial Times "The bank has now beaten analysts' forecasts for five quarters in a row."

This has caused some analysts to respond that Mr. Dimon and JPMorgan have gotten very good at "playing the market" in their ability to "deliver consistently" dismal earnings projections and then out performing expectations.

To me, this all takes the focus away from the overall performance of JPMorgan, which has not been all that satisfactory. By this I mean that the return on shareholder equity JPMorgan has earned over the past several years has been pretty dismal.

Here we are almost seven years after the end of the Great Recession and JPMorgan earned only 9.9 percent on shareholder equity for 2015 and is expected to earn only 9.0 percent in 2016.

This expectation is in spite of the fact that the bank posted a 12 percent return on equity in the first quarter of 2016, down from a 14 percent return on equity in the first quarter of 2015.

However, Nathaniel Popper, reports in the New York Times, "The first quarter is typically a strong time for global banks, as clients prepare to put their money to use…" and even though down this year, the first quarter is still expected to exceed all others, as it did in 2015.

In terms of the lending business, the primary business, supposedly, of commercial banks, margins continue to be squeezed by the low level of interest rates. That is, investors should not expect much of institutions like JPMorgan in terms of the basic banking business.

On the other hand, JPMorgan set aside a large allocation for potential loan losses, primarily for loans made to the oil and natural gas industries. The provision for credit losses almost doubled over the past year, from $959 million in the first quarter of 2015 to $1,824 million in the first quarter of 2016,

And, this is one thing I believe investors should watch out for, the fact that maybe the banking system is not as strong as some people might think it is. I believe that this is one reason that the Federal Reserve has been so cautious in not removing reserves from the banking system over the past year since its third round of quantitative easing ended.

I have posted this view many times over the past five years as a reason for keeping so many reserve dollars in the banking system. This is helping regulators merge weak banks from the banking system as we saw 265 banks leave the industry in 2015.

Earnings during most of the current economic recovery have come from the investment banking and from the trading areas, not the core banking business.

It is these areas that have resulted in the greatest declines in recent times. The revenue from both stock and bond trading were down, depressing overall market revenue by 13 percent from a year earlier. The volatile markets also put a damper on mergers and acquisitions as revenues from this source fell by 19 percent, year over year.

Yes, JPMorgan Chase beat analysts expectations, but the performance was not really that strong and certainly doesn't appear to me to be "solid" especially in the basic business of commercial banking. But, how much of the "beating expectations" is nothing more than corporate manipulation of the analysts?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Money Center Banks, Earnings
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