JPMorgan Chase (NYSE: JPM) surpassed analysts' earnings expectations in the third quarter, generating a $9.4 billion profit in a phenomenal performance for the bank.
Not only does that result top several quarters of pre-pandemic earnings results posted in 2019, but it does so while the bank is currently restricted from buying back stock. The quarter featured stronger-than-expected total revenue, barely any quarterly provision, another strong performance from the bank's corporate and investment bank, and losses once again being pushed out further on the horizon.
Here are five takeaways for investors from the quarter.
Image source: JPMorgan Chase.
1. Charge-offs keep getting delayed
The coronavirus pandemic has pushed the economy into a recession. But banks have yet to see the level of actual losses and write-offs they would have expected given that the economy essentially closed for more than a month in many states earlier this year, and the fact there are still roughly 12 million people unemployed.
Net charge-offs, which is debt that is unlikely to be collected, actually dropped in the third quarter by 24% from the linked quarter and 14% year over year. Furthermore, JPMorgan CEO Jamie Dimon and CFO Jennifer Piepszak said on the bank's third-quarter earnings call that they don't expect charge-off levels to meaningfully increase until the back half of 2021.
While total non-accrual loans at the bank -- those that haven't received a payment in at least 90 days -- have jumped 18% from the linked quarter, and nearly doubled from the third quarter of last year, Piepszak said this is a result of residential mortgage borrowers coming off deferral programs and into the non-accrual bucket. Still, Piepszak said due to the amount of equity this group of people already have in their homes, the bank is not as worried about these borrowers right now.
"So really, when we talk about losses really emerging in a significant way not until the back half of 2021, we are talking about cards," said Piepszak. "Given the amount of stimulus and payment relief and just support in the system, we haven't seen delinquency buckets begin to fill up and we charge[-off] 180 days past due in cards, so that is primarily just a timing issue."
Piepszak clarified that charge-offs could still rise on the wholesale side, or perhaps a one-off in consumer, but nothing crazy until later in 2021. It does seem that in every quarter of this year, bank executives keep pushing loan loss projections further down the road.
2. Will stimulus be a strong enough bridge?
Did the Paycheck Protection Program, $1,200 stimulus checks, and other forms of government stimulus change the trajectory of loan losses, or did it just delay them?
That was one of the questions Bank of America analyst Erika Najarian asked after JPMorgan execs said they don't think charge-offs would significantly rise until the back half of 2021. While it's difficult to know, Piepszak said she thinks the purpose of stimulus initiatives is to ultimately change the outcome of loan losses. "People sort of describe it as a bridge. The question is whether the bridge will be long enough and strong enough to bridge people back to employment, and bridge small businesses back to normalcy," she said.
3. Not concerned about net interest income
Deposits have flooded into the banking system since the pandemic began, creating lots of excess liquidity. Unfortunately for banks, loan demand, particularly on the commercial side, has been curtailed by economic uncertainty, and the low-rate environment has and will continue to squeeze net interest income (NII) -- and therefore the net interest margin (NIM). This makes deploying this excess liquidity and finding opportunities to help the bank's revenue outlook from interest-earning assets difficult. However, despite having plenty of cash on hand, Dimon said the bank would be patient.
"We are not going to do anything to protect the NII," he said. "We have $300 billion of cash we could invest today and that becomes $400 billion. We are not going to invest in stuff (investment securities) making 50, 60, or 70 basis points (70 bps = 0.70%) so we can get a teeny bit more of NII. We are going to make long-term decisions for the company and if NII and NIM gets squeezed a little bit so be it."
Dimon's rationale stems from the fact that if you invest in five- or 10-year securities with these small yields now, you will lose a lot of money if interest rates do rise in a few years. He also said the bank is capable of dealing with and performing well in the low-rate environment.
4. Stock buybacks ASAP?
I think by now it's fair to assume that JPMorgan will start buying back stock as soon as it can. The Federal Reserve banned stock buybacks in the third and fourth quarters. Dimon said on the bank's second-quarter earnings call that he wouldn't rule out buybacks in the fourth quarter.
However, now that they are banned, the bank seems to be hopeful that it will be able to repurchase shares in the first quarter of next year. "We are hopeful the Fed will see what they need and get what they need in the [stress testing] resubmission to give them the confidence to revert to a more normal distribution framework," said Piepszak. "If we have excess capital and we do not have regulatory restrictions, you could see us buy back stock as early as the first quarter."
The bank added $7 billion to its common equity tier 1 (CET1) capital in the third quarter, and now has a CET1 capital ratio of 13%, leaving it plenty of room over its required minimum of 11.3%.
5. Will investment banking ever slow down?
While it didn't have the same insane performance as last quarter, JPMorgan's corporate and investment bank performed incredibly well. Total net revenue for the division was roughly $11.5 billion in the third quarter, down close to $5 billion from the linked quarter, but still 21% higher year over year.
That's better than JPMorgan executives were expecting at the end of the second quarter, but Piepszak maintained her position that the division's performance should continue to normalize in the fourth quarter.
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