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JPMorgan Chase & Co. (JPM) only produced a return on tangible common equity of 14 percent in the first quarter of 2022.
It has been performing at a higher level and its goals are for a greater return, but, this was not too bad a performance for a major large bank.
The problem, at this time, is not bad assets.
And, the problem is not from the basic core business of the bank.
Average loans were up about 8 percent over the first quarter of 2021, after accounting for the runoff from the government’s Paycheck Protection Plan.
The problem was not from Main Street.
Profits dropped around 42 percent from the same period of 2021 primarily due to a drop in dealmaking and a modest increase in reserves to protect the bank from a possible recession in 2022.
Last year, JPM earned $14.3 billion in net income in the first quarter of the year.
This year in the first quarter, net income fell to $8.28 billion.
JPMorgan’s stock price is down about 20 percent this year compared with a decline in the S&P 500 Stock Index of only about 7 percent.
What’s changed?
Well, investment banking is down this year.
Total investment banking fees are down around 31 percent this year.
Of this, equity underwriting dropped 76 percent.
Trading revenue dropped around 3.0 percent.
The performance was “not bad” and only looks bland relative to the numbers JPMorgan has been posting in recent times.
The Past Two Years
Please remember that over the past two years, the Federal Reserve has been pumping billions and billions of dollars into the banking system.
Commercial banks have gotten their balance sheets in order.
Debt markets have boomed.
And, mergers and acquisitions have been going on all over the place.
Furthermore, all the “risk” measures of the bank have improved due to all the liquidity around and the capital ratio is now in a very strong position.
All commercial banks are in better financial condition than they were before.
Note, that all the activity that has just been presented, the activity about investment banking results and trading revenue, etc., have had nothing to do with banking assets or balance sheet composition.
The decline over the year has come in “service” income, something that in the investment banking world can be highly volatile.
And, this is what you see when you get drops in revenues of 31 percent or 76 percent.
This is a picture of the structure of the “modern” giant financial institutions like Citicorp, Bank of America, and Wells Fargo.
These are the results you will see in most of the earnings reports of these major banks this week. Large volatile results compared with last year.
The Future?
So, what about the future?
Well, I have been writing a lot recently about the uncertainty that exists within the economy and the financial institutions at this time.
There is so much going on and so many possible outcomes for the future that cannot really be defined, that one can only define the period as one experiencing radical uncertainty.
A year ago, inflation was not the reality it is now.
A year ago, people could not imagine that the pandemic would hit 2021 as hard as it did.
A year ago, if anyone would have suggested that the Russians would invade Ukraine, they would have been dismissed as a gloomy pessimist.
Lots and lots of “unknowable” uncertainty.
Well, Jamie Dimon, Chief Executive of JPMorgan Chase is talking about the future this way.
Speaking at the earnings release, Mr. Dimon stated that
“the bank was optimistic about the U.S. economy, but cautioned investors about ‘storm clouds on the horizon’ of rising inflation and the conflict in Ukraine.”
Mr. Dimon went on:
“I can’t tell you the outcome of it. I hope those things all disappear and go away, we have a soft landing and the war is resolved.”
And, then Mr. Dimon closed,
“I just wouldn’t bet at all that.”
“Those are very powerful forces, and those things are going to collide at one point.”
“No one knows what’s going to turn out.”
And, there you have it!
No One Knows
That is the picture of the future, presented by a major bank executive, the chief executive of a bank that is well structured financially and one that is earning returns consistent with an organization that maintains a sustainable competitive advantage in its industry.
That is what the investor is facing.
What is going to happen in Ukraine? It seems to depend on one individual.
What is going to happen to inflation? It seems to depend on one central bank.
What is going to happen to the U.S. budget? It seems to depend on the current administration.
I believe that, right now, no one is particularly confident about how these situations are going to play out.
JPMorgan Chase & Co. is representative of how this environment impacts organizations and their performances.
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