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Higher Provisions Weigh on JPMorgan Chase’s Q1 Earnings

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JPMorgan Chase (NYSE:JPM) reported lower-than-expected first-quarter numbers today. As expected, a significant jump in provisions weighed on the bank’s profitability. However, the company’s capital position and liquidity are strong. Also, the company had impressive loan and deposit growth in the first quarter.

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JPMorgan Chase’s Q1 earnings

JPMorgan Chase posted net revenue of $28.3 billion—down about 3% from the same period the previous year. Moreover, revenues fell short of analysts’ expectation of $29.7 billion, which reflected deposit margin compression. The company’s end-of-period loans increased 6%, while deposits rose 23%.

The net interest income was flat at $14.5 billion, which reflected that the growth in loans and deposits was offset by lower interest rates. Meanwhile, the non-interest revenues were $14.5 billion—down about 5%. The non-interest expenses increased 3% year-over-year to $16.9 billion due to higher legal costs.

The provision for credit losses rose to $8.3 billion—up about $6.8 billion from the same period the previous year. Commenting on the higher reserves, Jamie Dimon, JPMorgan Chase’s chairman and CEO, said that “given the likelihood of a fairly severe recession, it was necessary to build credit reserves.” The rapid spread of COVID-19 cases has taken a toll on the economy. Besides, the plunge in oil prices further deteriorated the macroeconomic environment.

JPMorgan Chase posted an EPS of $0.78 in the first quarter—down from $2.65 in the same quarter the previous year. Analysts expected the company to post an EPS of 1.84 in the first quarter.

Since other major banks like Citigroup (NYSE:C) report their earnings tomorrow, I expect a considerable increase in the provisions to hurt profitability. Analysts expect a double-digit decline in large banks’ profits including Citigroup, Goldman Sachs (NYSE:GS), and Bank of America (NYSE:BAC).

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Notably, Wells Fargo (NYSE:WFC) posted revenues of $17.7 billion—down about 18% YoY (year-over-year). The bank’s net interest income fell by nearly $1 billion, while the non-interest revenues decreased by $2.9 billion. Wells Fargo’s provisions for loans increased to $4.0 billion, which reflected a YoY increase of $3.2 billion.

Segment performance

The bet revenues in the Consumer & Community Banking segment fell 2% YoY to $13.2 billion. Meanwhile, the net income fell 95%, which reflected a surge in reserves. The provision for credit losses was $5.8 billion—up about $4.5 billion from the first quarter of 2019, which reflected higher reserves.

The revenues in the Corporate & Investment Bank segment fell 1% to 9.9 billion, which reflected deposit margin compression and lower advisory fees, partially offset by higher revenues in markets and securities services. Overall, the net income fell 39%, which reflected the provision for credit losses of $1.4 billion.

The Commercial Banking segment’s revenues fell 10% to $2.2 billion due to the lower deposit margin. However, the net income slumped 86%, which reflected reserves of $1 billion.

The Asset & Wealth Management segment’s revenues increased 3% to $3.6 billion, which reflected higher management fees. Notably, the net income was flat at $0.7 billion despite higher provisions.

What’s in the offing?

The weak macroeconomic environment and higher provisions could hurt banks’ profitability in 2020. JPMorgan Chase expects its 2020 net interest income to be $55.5 billion—down from $57.8 billion in 2019. The low interest rate environment will likely drag the net interest income down. Also, a decline in fees and lower activity in the investment banking division could hurt the non-interest revenues.

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