$JPM - healthy activity, same playbook.

Macro Perspectives: Thu 14 Apr 22

JP Morgan kicked off Q1 earnings season yesterday.

It's the biggest bank in the U.S. - no entity is closer to the pulse of the consumer, business and government than JP Morgan. So this should give us a clue on what the coming weeks of earnings reports will look like, right? Here's what the headlines looked like coming into the market open...

Slowdown. Profit drop. Bad news. Dislocations.

Sounds pretty bad. Let's take a look;

• First, this is a bank that returned $4.7 billion to shareholders in the quarter - things can't be too bad.

• At $30.7 billion, JP Morgan posted it's third highest quarterly revenue on record. This revenue number was only topped by Q1 of last year and Q2 of 2020 - both of which were quarters where the government was handing out stimulus checks!

What about earnings? Well, in Q1 JPM broke a seven quarter streak of earnings beats. Worse, as Reuters says, they had a 42% profit drop. Are they getting squeezed by higher costs?

Not really. Before we get into the details, let's take a look back at an excerpt from my note heading into Q2 2020 earnings (this is the quarter of the initial lockdown and the massive initial policy response). 

From July 14, 2020 Macro Perspectives: "We should expect all of corporate America to take this opportunity, in their Q2 earnings reports, to put all of the bad news they can muster on the table.

In a widespread economic crisis, this is their chance to write down the value of anything they can justify, take loss provisions on as much as they can, and set the bar as low as they can, so that in the quarters ahead, they can outperform expectations." 

They did just that. In the case of JP Morgan, in the first two quarters of the pandemic, they diverted $16 billion from the bottom line, and directed that money into "loan loss reserves." They spent the past six quarters (prior to yesterday’s release), moving these "loan loss" reserves back to the bottom line, at their discretion.

With that, by the third quarter of 2020 (still in the thick of the global health crisis) they were blowing away earnings estimates and posting record earnings (an embarrassment of riches, thanks to the credit backstop supplied by the Fed and the revenue tailwinds supplied by fiscal stimulus).

Same playbook is happening now (the earnings management game). Yesterday’s "hit to earnings" came from voluntary "credit costs." Again, this is taking the opportunity to set the bar low, so that in the quarters ahead, they can manage earnings to outperform expectations.

For Q1, if we add back the money set aside as the provision for loan losses, JP Morgan would have beat earnings estimates, and would have posted a net income of over $9 billion. That's very close to record earnings, when adjusting all of the earnings of the past six quarters for either the credit reserve build or releases.

Bottom line: The activity at the country's biggest bank is quite healthy.