Bbanks are considered good economic indicators. And when the American banks traditionally report first on their business in the past quarter, the entire financial world pays close attention. This was also the case on Thursday, when JP Morgan and Morgan Stanley were the first to report a surprisingly significant drop in profits. In Germany, the Dax then rushed down significantly by more than 2 percent. There are good reasons for that.
JP Morgan Chase braces for tougher times. The bank strengthens its capital and its reserves. The largest institute in the United States is therefore stopping the purchase of its own shares worth billions, which was only announced in April, in order to meet the higher capital requirements of the banking regulator more quickly. The bank also set aside $1.1 billion for non-performing loans in the second quarter. Despite a 28 percent slump in earnings, JP Morgan still earned $8.6 billion between early April and late June. Investment bank Morgan Stanley’s surplus fell from $3.4 billion to $2.4 billion in the second quarter of 2022. Both are still very adequate, as the comparison with Deutsche Bank shows. Deutsche Bank reported a net profit of 2.4 billion euros for the full year 2021.
With this strengthening of reserves, however, JP Morgan, which has been managed by Jamie Dimon since 2005, is only reacting to what it called “a slight deterioration in the economic outlook” on Thursday. A month ago, Dimon had spoken of a hurricane looming given the rampant inflation. In this respect, the only slightly pessimistic economic outlook is surprising. The suspension of the share buyback program comes as no surprise to analysts, according to UBS. On the contrary, the analysts of the Swiss bank were positively surprised that JP Morgan was able to increase its equity ratio from 11.9 to 12.2 percent in the second quarter and thus in the direction of the regulatory requirement of 12.5 percent. However, the focus on Thursday was on loans that could default in banks due to the risk of recession in the global economy.
Stockbrokers trust the Fed to jump in interest rates by one percentage point
The moderate increase in loan loss provisions ($428 million for bad loans, $657 million for net write-downs) is largely responsible for the fact that net profit in the second quarter of 2022 fell from $11.9 billion in the same quarter last year to $8.6 billion. Analysts had expected a not-so-large drop to $8.9 billion on average. In the same quarter of the previous year, JP Morgan released $2.3 billion in reserves that the bank had set aside in the Corona crisis but did not need.
—
— (–)
For detailed view
However, there were also significant shifts in the income mix in the capital market business. Investment bankers at Morgan Stanley and JP Morgan received 55 percent and 54 percent lower fees, respectively, because business with IPOs and company acquisitions was paralyzed by recession fears. In addition, JP Morgan had to make mark-downs of $257 million on bonds it holds. The sudden turnaround in interest rates left its mark here, which led to a significant fall in bond prices.
In the fight against annual inflation, which has jumped to more than 9 percent in the USA, stockbrokers now even consider it likely that the Federal Reserve will increase its key interest rate by a full percentage point at the end of this month. These rapidly and significantly shifting interest rate expectations lead to strong price fluctuations, from which investment banks in turn benefit. JP Morgan’s trading revenue rose 15 percent to $8.7 billion. All in all, JP Morgan’s investment banking contributed $3.7 billion to net income, up from a good $5 billion in the year-ago quarter.
JP Morgan earns less, but typically a lot more stable, from retail banking, a business it got in America when it bought Chase Manhattan Bank in 2000. But here, too, the turnaround in interest rates and the fear of a recession left their mark. Because of more loan loss provisions, the private customer business (commercial banking) contributed only $ 994 million to net profit after $ 1.4 billion in the same quarter last year. The labor market in America is still very robust. However, high inflation is eroding consumer confidence, Dimon admitted. Nevertheless, JP Morgan is expanding in the private customer business, and not only in the USA. In September 2021, JP Morgan launched a retail digital bank in the UK using the Chase brand. If the British Chase is successful, JP Morgan could also stir up the private customer market in Germany with current accounts and cards.
