Pro Perspectives 7/14/20

July 14, 2020

JP Morgan and Citi reported this morning before the open.  We talked about the backdrop for these reports yesterday. 

We expected to see big loan loss provisions.  Check.  JP Morgan, Citi and Wells Fargo set aside more than $26 billion in allowance for futures losses on loans. 

And yet we talked about the likelihood of seeing good, and maybe very good performance from the banks on the quarter.  For JP Morgan, the biggest U.S. based global money center bank, it wasn't just good, it was record setting good.  

They reported a record $33 billion in revenue — a 15% growth rate, year-over-year.  That's one of the largest banks in the world growing at 15%

Wall Street was looking for EPS of $1.04 (that's down 63% from the same period a year ago).  They reported $1.38.  That's a beat.  Great.  But that doesn't nearly describe the quarter. 

Let's take a look at what really happened. 

As we discussed, it was a given that the banks would take advantage of the environment and take a huge provision for loan losses.  In JPM's case, they set aside over $10 billion from the quarter, to ramp up an already huge loan loss reserve war chest. 

On the one hand, it looks like they're positioning themselves as ultra-conservative on the economic outlook.  On the other hand, if a worst-case scenario were to unfold, having the JPM war chest of $34 billion wouldn't come close to absorbing the losses.

That's why the Fed, Treasury and Congress had to, and did, go all-in — and did so quickly — to neutralize the economic apocalypse scenario.  And there is no pulling back.  If they need to do more, they will.

With that in mind, as we discussed yesterday, because policymakers have protected the balance sheets of consumers and businesses, and because policymakers have pumped trillions of dollars into the economy, and intervened to ward off threats to the financial system, the banks were given glidepath to print profits. 

With that, JPM reported record markets revenue (up 79%) in the quarter.  Investment banking fees were up 54% in the quarter.  Deposits were up 20% in their consumer business and 41% in their commercial business.  Loans were up 13%.  Overall, JP Morgan created $1.2 trillion of credit in the second quarter. 

Bottom line:  We expected the banks to "take cover" from a broad economic crisis, to manufacture lower earnings.  They did.  But if we strip out the loan loss provisions, things look very different.  JPM would have made a record $3.57 in EPS.  That's 27% earnings growth from the same period a year ago. 

It's time to buy the bank stocks.