Tough June quarter for the Morgans

As expected, big US banks JPMorgan Chase and Morgan Stanley delivered on weaker second quarter earnings on weak dealmaking revenues, higher loan loss reserves and other one-off costs.

Net earnings at JPMorgan Chase dropped 28% in the June quarter as it also announced it was suspending share buybacks to meet tougher new capital requirements imposed by the Federal Reserve.

Rival Morgan Stanley also revealed a 29% slide in quarterly earnings.

Similar results are expected tonight from Citigroup and Well Fargo and on Monday from Bank of America and Goldman Sachs where analysts reckon the fall could be more than 50%.

JPMorgan’s results missed analysts’ expectations. Net earnings for the quarter were $US8.2 billion, down from $US11.5 billion in the June quarter of 2021.

Analysts had forecast quarterly net income to be down at $US8.5 billion, a fall of around 25%.

This was the first time since the first quarter of 2020 that JPMorgan has missed profit expectations, according to FactSet.

Higher revenues from lending thanks to rising interest rates as well as robust earnings from trading from volatile markets failed to offset a slide in dealmaking revenues and earnings.

In the earnings statement, CEO Jamie Dimon said JPMorgan had “temporarily suspended share buybacks” after the Fed hit it last month with a higher capital requirement for its stress buffers.

Naturally Dimon didn’t like the stress test results for his bank and criticised the process.

“We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary,” he said in answer to a question about the tests from an analyst.

Understandable really because it means the bank’s shares are now exposed more than ever to the vagaries of investor confidence instead of being supported by the buyback (which is really using shareholder money).

JPMorgan shares fell 5% at one stage to a new year’s low and ended the day down 3.5%.

Morgan Stanley shares closed down 0.4% after reporting a drop in quarterly profit as dealmaking slumped amid soaring market volatility.

Profit dropped 29% to $US2.5 billion from $US3.51 billion a year ago.

Revenue fell 11% to $US13.13 billion from $US14.8 billion, driven by the steep 55% decline in investment banking revenue.

Morgan Stanley repurchased $US2.7 billion of its own stock during the latest quarter and its board has approved a new $US20 billion program.

Buried in the details of the release was an unexplained $US200 million loss from a “regulatory matter tied to the use of unapproved personal devices and record-keeping requirements.” That cut earnings by nearly 8% alone.

Morgan Stanley edged up a credit loss provision to $US100 million from $US73 million. It doesn’t have the same breadth of consumer banking that JPMorgan has.

With its bigger business in consumer banking plus lending, JPMorgan added a net $US428 million to credit reserves in the quarter amid growing worries that interest rate rises by the Fed will tip the US economy into a recession.

A year earlier, the bottom line was boosted by $US3 billion of reserves releases that were boosted in the first wave of the Covid pandemic in 2020.

A feature of Morgan’s numbers though was the biggest quarterly rise in interest income in 10 years.

In the immediate term, JPMorgan is benefiting from rising rates. The bank reported net interest income of $US15.1 billion, up 19% from the same quarter in 2021. It also saw JPMorgan lift its target for net interest income for this year to more than $US58 billion, from more than $US56 billion previously.

Other banks will be seeing the same boost in the US, Australia, UK, Canada, NZ and most other countries because of the rise in rates.