JPMorgan Chase Second Quarter Profits – And More Questions – Seeking Alpha

It’s bank earnings time. And, what seemed to get all the attention leading up to Friday’s earnings announcement at JPMorgan, Chase & Company (NYSE: JPM) and got even further major attention when the results were actually were finally announced? Trading results.

Jamie Dimon, JPMorgan’s Chief Executive Officer and President, responded to all the attention the numbers on trading got:

“Who cares about fixed income trading n the last two weeks in June? I mean, seriously?”

I totally agree with Mr. Dimon on this point. Trading results take the focus away from running a banking enterprise and depends more upon financial market conditions – low volatility – rather than upon the shape of the bank and how economic conditions are impacting bank performance.

In terms of the more important news to be reported, there was the good news and the bad news.

The good news is the JPMorgan reported the “best even” quarterly profits of $7.03 billion, up 13 percent from one year ago.

Marianne Lake, CFO of the bank, was quoted in the Wall Street Journal as saying that, “Total loans rose 4.1 percent from a year earlier….Net interest income rose 7.6 percent…”

Ms. Lake, however, “trimmed forecasts for growth in both these areas.” Loan growth, which had formerly been forecast to come in with a 10 percent rate of growth for the year, was trimmed to an expectation of 8 percent.

And, even more important, “Net interest income is now expected to rise by $4 billion, down from earlier guidance of $4.5 billion.”

One reason for the reduction in the these numbers was the fact that the economy was not accelerating at the pace formerly forecast; inflation rates were down putting a lid on the rise in longer-term interest rates and lending rates, even though the Federal Reserve was consistently raising its policy rate of interest and has indicated it will continue to keep raising the rate; government policies to stimulate business spending and infrastructure spending were not getting passed; and financial re-regulation was not happening.

Mr. Dimon even released some of his frustration about what was happening in Washington, D. C. in responding to a question and indicated that because of the uncertainty and/or disillusionment created by this situation, business leaders were just not stepping out and committing themselves to capital expenditures in such an environment.

The bottom line, as far as the future performance of JPMorgan, Chase, and the banking industry, seems to be that Mr. Dimon and Ms. Lake do not see things getting better profit wise through the rest of 2017.

It was this mood that investors seemed to pick up on as they JPMorgan stock dropped off during the day.

Looking at JPMorgan’s return on shareholder’s equity, the ROE of the bank was 12 percent for the second quarter of 2017, up from a 10 percent ROE for the second quarter of 2016.

This is good news, because the rough estimate of the cost of capital for the large, major commercial banks is assumed to be around 10 percent. This is one of the very few times that JPMorgan has produced a quarterly ROE that has been above or exceeded this cost of capital since the beginning of the financial crisis almost ten years ago.

The bad news is that given the report of Ms. Lake, it seems to be highly unlikely that JPMorgan will post results through the rest of the year that exceeds its cost of capital. Thus, the bank has not returned to its pre-financial crisis performance levels, in which the ROE of the organization exceeded 15 percent. And, given Ms. Lake’s expectations, it seems as if, for now, the 12 percent return is not yet sustainable for the longer-run.

This, to me, is the major issue facing JPMorgan and the other major banks. With lower leverage ratios, tighter lending standards, with heavy regulatory pressures, a modestly growing and lower net interest margins can JPMorgan produce the results it once posted?

The other major factor facing JPMorgan and the banking industry is the intrusion of FinTech into the picture over the next five years or so. As reported earlier, the general consensus is that the commercial banking industry is running far behind the advances being made in FinTech.

At the most basic level, I wonder about what the large commercial banks are doing about the payments system. Others seem to me to be dominating the advances being made.

Furthermore, there seems to be a bifurcation arising on the horizon between those that are doing retail banking and lending and those that are doing commercial and investment banking.

One hears very little from JPMorgan, Chase – and other major banks – about these issues and, frankly, I would like to hear more from Mr. Dimon, Ms. Lake, and others about the business model that they are creating for the future and how they expect to execute this model.

Things like these are way more important to judging the leadership and direction of commercial banks in the future than whether or not trading profits were up or down this quarter.

I still believe that JPMorgan, Chase is one of the better run institutions in the industry, but I would still like further insight into some of their thinking, especially with respect to FinTech.

JPMorgan has recovered from the financial crisis and seems to be financially in acceptable shape. However, is it prepared for the next five to ten years? This we need to hear more about.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

JPMorgan Chase Second Quarter Profits – And More Questions – Seeking Alpha

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