JPMorgan Chase said on Thursday its second-quarter profits slumped as the bank built up $428 million in bad debt reserves and postponed share buybacks.
The actions reflect the increasingly cautious attitude of Chairman and CEO Jamie Dimon. “The US economy continues to grow and both labor market and consumer spending, and their ability to spend, remain healthy,” he said in the press release.
“But geopolitical tensions, high inflation, declining consumer confidence, uncertainty about how high tariffs should go and unprecedented quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its damaging effect on global energy supplies. and food prices are very likely to have a negative impact on the global economy someday,” he warned.
With this outlook, JPMorgan has chosen to “temporarily” suspend its share buybacks to meet regulatory capital requirements, a prospect analysts feared earlier this year. Last month, the bank was forced to keep its dividend unchanged, while rivals increased their payouts.
Shares of JPMorgan fell nearly 5% in Thursday’s trading, reaching a new 52-week low.
Here’s what the company reported compared to what Wall Street expected, based on a survey of analysts by Refinitiv:
- Earnings per share: $2.76 vs. $2.88 expected
- Revenues under management: $31.63 billion versus $31.95 billion expected
Earnings fell 28% from a year earlier to $8.65 billion, or $2.76 per share, driven largely by reserve building, New York-based JPMorgan said in a statement. A year ago, the bank benefited from a $3 billion release from its reserve.
Managed revenue rose 1% to $31.63 billion, helped by tailwinds from higher interest rates, but still fell short of analyst expectations, according to a Refinitiv survey. It was only the second time JPMorgan missed out on both profits and sales since 2020.
The bank’s earnings are “not terrible” as the non-Wall Street business performed well as deposits grew and borrowers continued to repay debt, Wells Fargo banking analyst Mike Mayo said in a research note. But it would be tastier if the bank lowered spending guidelines, he added.
JPMorgan, the largest US bank by assets, is being watched closely for clues as to how the banking sector fared in a quarter marked by conflicting trends. On the one hand, unemployment remained low, so that consumers and businesses had little difficulty repaying loans. Rising interest rates and credit growth mean that banks’ core lending business is becoming more profitable. And the volatility in the financial markets has been a boon to fixed income traders.
But analysts have begun to lower earnings estimates for the sector amid concerns about an impending recession, and most major banking stocks have plunged to 52-week lows in recent weeks. Revenues from capital market activities and mortgages have fallen sharply, and companies are reporting write-offs amid the broad decline in financial assets.
Importantly, a key tailwind that the industry enjoyed a year ago — reserve releases as loans outperformed expectations — have begun to reverse as banks are forced to set aside money for potential defaults as recession risk mounts.
The bank had a $1.1 billion provision for loan losses in the quarter, which included the $428 million reserve build-up and $657 million in net loan write-offs for soured debt. JPMorgan said it added to reserves because of a “modest deterioration” in the economic outlook.
In April, JPMorgan was the first of the banks to begin setting aside funds for loan losses, posting $902 million in credit reserve building in the quarter. That was in line with the more cautious outlook expressed by Dimon. In early June, he warned that an economic “hurricane” was on the way.
Asked on Thursday to update his forecast, Dimon told reporters on a conference call that it hadn’t changed, but that concerns were getting closer and some of the financial disruptions he had feared were beginning to materialize.
The slowdown in Wall Street deals stung JPMorgan, which has one of the largest activities on the street. Investment banking fees fell 54% to $1.65 billion, $250 million below the $1.9 billion estimate. Sales in that division were impacted by $257 million in write-downs on positions in the company’s bridge loan portfolio.
Fixed income trading revenues were up 15% to $4.71 billion, but that was still well below analysts’ estimate of $5.14 billion for the quarter as strong results in macro trading were offset by weakness in credit and securitized products. Equity trading revenues also rose 15%, to $3.08 billion, ahead of the $2.96 billion estimate.
It was the second best quarter ever for the bank’s trading income, Wall Street division chief Daniel Pinto told employees in a memo after the results were released.
A tailwind for the company are rising US interest rates and a growing number of loans. Net interest income rose 19% to $15.2 billion for the quarter, surpassing analyst estimates of $14.98 billion.
JPMorgan said at the company’s investor day in May that it could hit a key target of 17% return this year, ahead of expectations, thanks to higher rates. In fact, the bank reached that level this quarter.
Shares of JPMorgan are down 29% through Wednesday this year, worse than the KBW Bank Index’s 19% drop.
Morgan Stanley also announced gains on Thursday and, like JPMorgan, results were below Wall Street’s expectations. The bank was hurt by a decline in investment banking income.
Wells Fargo and Citigroup are expected to release their results on Friday and Bank of America and Goldman Sachs are scheduled for Monday.