JPMorgan sounds the alarm

Summary

Shares of all large U.S. lenders headed lower on Friday after JPMorgan called out the White House’s trade policies.

Solid quarter

JPMorgan reported its best-ever second-quarter (Q2) net income of $8.31bn or $2.29 a share. The typical seasonal decline against Q1 was present, but EPS was still comfortably above the $2.22 Wall Street expected. Additionally, unlike smaller rival Citigroup, which also reported on Friday, JPM’s wider underlying Q2 performance was also solid. Returns attributable to shareholders were strong. Return on Tangible Equity (RoTE) rose to 14%, from 12% in Q1 2017, well above the roughly 10% level large banks generally need to have a chance of sustainable profitability. Growth in all four JPM businesses pushed total revenue to $28.39, up 6.5%, and above Wall Street’s forecast.

Trading high

Trading revenue was an obvious stand out and equity markets were the driver, up by almost a quarter on the year to $2bn, lifting total trading proceeds by 13%, way above the 1% consensus forecast. Bond trading also rebounded with a 12% rise. Increased stock market volatility in the quarter undoubtedly helped trading operations find their feet. JPM described capital markets as “open and active” after several patchy quarters since late 2016. Some post-earnings wariness therefore may be linked to concerns that volatility could again succumb to the unearthly calm seen for most of last year. It’s one reason the stock struggled to hold even meagre gains throughout the session. Investors also shrugged off what the bank described as a “healthy” consumer, driving double-digit client investment growth, card sales and merchant processing. These lifted the core loan businesses 7% on the year.

Wells drags; Citi scepticism

Some of the tardy stock market reaction to JPM earnings followed far less robust performances by competitor Wells Fargo and Citigroup. The former missed forecasts as its loans and deposits growth fell to the bottom of the pack in Q2. The latter posted EPS of $1.63 against $1.28 expected but with trading revenue mixed—an 18% rise in stocks and a 6% fall in bonds—leaving the total down 1%. Citi also has the lowest number of shares in issue, 2.55 billion compared to Wells’ 4.87 billion and JPM’s 3.38 billion. So, Citi, the smallest of the three, by assets, is also something of a lightning rod for criticism about the extent that share buybacks influenced earnings per share gains of the banks reporting on Friday. Citi’s EPS was up 27% in Q2, compared to a 16% net income rise.

“Unpredictable outcomes”

Perhaps the biggest weight on shares of dominant U.S. banks though was the subject senior JPMorgan execs saved their most pointed and negative comments for: trade disputes between the U.S. and China and many of its largest trading partners. Whilst both CEO Jamie Dimon and CFO Marianne Lake stressed they saw no signs the conflict was impacting business activities or lending, Lake noted the subject was “on people’s minds” and was a “risk”. Dimon warned that “unpredictable outcomes” can happen “when you start trade skirmishes with multiple countries”. As signals go, the co-ordinated comments were a strong one. Furthermore, correctly or not, investors could read them as setting up a potential future explanation if Q2 growth proves to be a high point. Either way, the comments show that despite a huge boost from lower taxes, other pressures are building for large U.S. banks. Another post-earnings session with all pivotal lenders in the red speaks volumes about investors’ verdict on the outlook. It casts some uncertainty on investor reactions to the remainder of the earnings season, which is forecast to be a strong one.