Yesterday, many hoped that JPMorgan’s first quarterly results since the
trading embarrassment would force its chief executive to eat an even bigger
slice. But not only were losses just a tad higher than expectations,
JPMorgan blew overall net income estimates out of the oven. Its retail
operation alone can make up the losses in under a year.
Investors should forget about London whale spotting and refocus on JPMorgan’s
underlying business. What do the second-quarter numbers reveal? For a start
investment banking remains tough going. Only one business line, equities, is
making more money now than a year ago. Global investment banking revenues
are lower across the board. Risk indicators are also worth watching. For
example, despite fixed income revenues falling 17 per cent versus last year,
value-at-risk (a measure of potential losses) for fixed income trading is
almost 50 per cent higher.
The story is much more positive for JPMorgan’s retail bank. To be sure, the
bottom line benefited from a whopping $1.4bn reduction in allowances for
loan losses and net charge-offs – contributing more than half of total net
income for retail. To be fair, delinquency trends are still heading downward
in most areas, from mortgages to credit cards. Branch numbers and deposits
are up. What seems to be happening is those banks willing to extend their
balance sheets – such as JPMorgan and Wells Fargo – are cleaning up as other
big domestic players remain cautious.
The direction of the US economy will determine if retail bets pay off. For
investment banking, though, the worry is that business will stay subdued
even if confidence returns. Regulation and capital management are partly to
blame. But many areas are overbanked. Humble or not, the pie is not big
enough.
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