JPMorgan Chase Slips On Weak Earnings
We don’t know Jamie Dimon personally but, after years of market watching, we have come to have great respect for this cool, calm, collected leader of the world's largest consumer bank. When he says he’s bracing for higher risks we take it seriously, not because he said it but because it echoes our own outlook for the near to mid-term. The takeaway here is that JPMorgan Chase (NYSE: JPM) reported a decent quarter but earnings were crimped, the outlook is cloudy, and the stock is falling. If this trend continues we see the S&P 500 moving back down to the recent lows and then falling right through them.
The Times Are Changing At JPMorgan
Last year when JPMorgan reported Q1 results the big news was how big the credit reserves were and how much the company would be able to release for dividends and buybacks. The answer to that question was billions but my how the times have changed. The big takeaway for us in the report is that credit costs and risk are on the rise and cutting into earnings rather than boosting them. The company reported $30.7 billion in net revenue which beat the consensus by 50 basis points but fell 5% versus last year. On a firm-wide basis, loans are up 5% and deposit 13% but strengths in the consumer segment were offset by weakness in the investment banking arm.
Moving down the report, the margin came in basically as expected and would have resulted in a slightly better than expected bottom-line result but there are two factors, both negative, impacting the results. The first is that write-offs related to Russia cost the company $0.13 in EPS. The second is that credit reserve buildup cost the company another $0.23 in EPS. The credit reserve build is still cash on the company’s books and may eventually get released but the takeaway for us is that credit risk is rising, losses may mount, and these squirreled away earnings may go up in smoke.
JPMorgan Increases Its Capital Return Program
JPMorgan is not failing or even ailing but economic conditions are not unfolding as expected. This may cap investor sentiment but does not impair the company’s ability to pay the 3% dividend or buy back shares. The board authorized a new repurchase program at the end of the quarter that is worth $30 billion in total purchases. No details were given on the timing of purchases or the duration of the program but $30 billion is worth about 7.7% of the market cap with shares trading near $130.
No analysts have issued commentary on the Q1 results yet but the trend in sentiment is faltering. The last two months have seen a series of downgrades and price target reductions that have the Pricetargets.com consensus rating at Hold verging on Buy with a price target that is 32% above recent action.
The Technical Outlook: JPMorgan Sets New Low
Shares of JPM have been trending lower over the past few months and set a new low in the wake of the Q1 results. The low was met by buyers so it looks like support will hold at the $125 level but it is too soon to bet on that. If support holds, we see another, more attractive entry point developing later in the quarter. If not, this stock could fall down to the $120 or even the $110 level.
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