Lower Fees, Reserve Build Fuel EPS Miss; Temporarily Pauses Share Buybacks to Build Capital
JPM EPS miss
JPMorgan (JPM/$111.91/not covered) reported 2Q22 EPS of $2.76, below consensus of $2.89 (consensus range of $2.50 – $3.15.) Lower fee income and a higher loan loss provision more than offset higher net interest income and lower noninterest expenses vs. consensus expectations. Of note, results included a $428 million net reserve build (~$0.11/share) and $218 million (~$0.06/share) of losses in its Corporate & Investment Bank (CIB), largely driven by funding spread widening. Notable highlights included:
(1) stronger net interest income vs. consensus driven by a larger than consensus increase in the NIM (up 13 bp to 1.80% vs. consensus of 1.75%) but partially offset by a decline in average earning assets (which also missed Street expectations);
(2) lower than consensus fee income driven by lower investment banking fees, principal transactions, mortgage, and other income (higher card income was a partial offset);
(3) a net reserve build, which primarily reflects loan growth as well as a modest deterioration in the economic outlook;
(4) lower than consensus noninterest expenses driven by lower revenue-related compensation;
(5) double-digit annualized period-end loan growth (11.5% ann.) that essentially matched Street expectations;
(6) a larger than consensus decline in deposits and average earning assets;
(7) a slight decline in TBV (down $0.05 to $69.53) but an increase in the CET1 ratio from 11.9% to 12.2%; and
(8) $224 million of net share repurchases (including the net impact of employee issuances) vs. consensus of ~$1.26 billion. On this last point, it noted that in order to quickly meet the higher requirements as a result of the recent stress tests and the already-scheduled G-SIB increase, it has temporarily suspended share buybacks (announced new $30 billion share repurchase program last quarter than became effective 5/1/22).
A headline miss fueled by lower fee revenue income (lower markets-related revenue including a drop in investment banking, FICC, and payments) and a slightly higher than consensus loan loss provision (LLR ratio up 1 bp to 1.61%).
While credit metrics remain benign (NPL ratio down 7 bp to 0.65%, NCO ratio up 1 bp to 0.25%), the slight reserve build and decision to more quickly build capital by temporarily pausing share repurchases is cause for concern amidst slowing economic activity and rising fears of recession. Moreover, the larger than forecast drop in deposits and average earning assets could weigh on net interest income growth expectations into 2023 depending on the pace/magnitude of future Fed rate hikes.
More positively, noninterest expenses were lower than Street expectations (due primarily to lower revenue-related compensation), which fueled a decline in the overhead ratio from 62% to 61%, and the greater than consensus NIM expansion drove the net interest income beat.
In its prepared remarks, Chairman and CEO Jamie Dimon noted: “The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy. But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
Looking ahead, it increased its 2022 net interest income (ex. Markets) to be +$58 billion vs. +$56 billion previously (due to a greater number of Fed rate hikes), reiterated its adjusted noninterest expense outlook of ~$77 billion, and expects the NCO ratio in Card to be <2% (1.47% in 2Q22, up 10bp sequentially).
? Revenue: Total revenues of $31.6 billion was slightly below consensus of $31.8 billion, driven by lower than consensus fee income expectations but partially offset by stronger-than-consensus NII from a higher NIM (although average earning assets were lower than Street expectations).
? NIM: NIM of 1.80% was up 13 bp q/q and 5 bp above consensus of 1.75%. Loan yields increased 23 bp to 4.28%, while interest-bearing deposit costs increased 16 bp to 0.20%.
? Loans: Total loans decreased by $30.9 billion (+2.9% q/q), driven by an increase in consumer (+1.5% q/q), credit card (+8.7% q/q), and wholesale loans (2.1% q/q).
? Fee income: Fee-based revenue was $16.4 billion (below consensus and down from $17.6 billion in 1Q22), driven by Investment Banking fees, Principal transactions, and other income. The decline was partially offset by higher lending and deposit-related fees, and Card income.
? Credit quality: The NCO ratio increased 1 bp to 0.25%, which was largely driven by an increase in credit card loans. The loan loss provision expense of $1.1 billion included a net reserve build of $428 million, reflecting a modest deterioration in the economic outlook compared to last quarter. NCOs were $657 million compared with $582 million in 1Q22. The NPL ratio was down 7 bp to 0.65% and the LLR ratio was up 1 bp to 1.61%.
? Expenses: Noninterest expense of $18.7 billion (-2.3% q/q) was modestly lower than consensus of $19.2 billion, which largely was driven by a sequential decline in revenue-related compensation (total compensation expense down 4.5% q/q) and partially offset by continued investments in the business and higher structural expense.
? Capital: Despite a sizable impact to AOCI, TBV only decreased $0.05 q/q to $69.53, while the CET1 ratio increased 30 bp q/q to 12.2%. Additionally, the company maintained its quarterly $1.00 dividend (36% dividend payout ratio), and in the quarter it made $224 million in net share repurchases (effective May 1, 2022 the board approved a $30 billion repurchase program). Importantly, it noted that “as result
of the recent stress test results and anticipated increases in regulatory capital requirements, share repurchases have been temporarily suspended.”
? Outlook: For 2022, it now expects ex. CIB net interest income to be +$58 billion (prior guide: +$56 billion; Street ex. CIB: ~$54.4 billion per Visible Alpha), while it reiterated its market dependent adjusted noninterest expenses guidance of ~$77 billion (Street: $76.9 billion).