J.P. Morgan’s Ahead of the Curve
Posted on: April 28, 2009 - Email Article - Printable Version
J.P. Morgan Chase [JPM: 42.93, 0.00 (0.00%)] was a beacon of light that the government had been waiting for this quarter. It reaffirmed its strength as a financial institution by crushing analysts projections of 32 cents a share, posting earnings of 40 cents a share. This news highlighted a week where the banking system may have finally pulled out of its dismal performances. Goldman Sach’s [GS: 171.94, 0.00 (0.00%)], Bank of America [BAC: 17.11, 0.00 (0.00%)] and Citigroup [C: 3.96, 0.00 (0.00%)] have also produced solid earnings. However, numerous questions have arisen to the strength of these companies’ earnings. J.P Morgan, however, is not stopping at just its latest filing, and has declared that it will repay its TARP money and avoid future government subsidies.
The Earnings
The returns produced by J.P. Morgan were very solid, as its first quarter net income was $2.1 billion, down from $2.4 billion the year before. Despite this small downturn, JPM still beat consensus estimates by 8 cents a share. These results were primarily driven by its Fixed Income Markets, which had revenue of $4.9 billion, a record high compared to the previous year’s quarter of $466 million. They beat expectations due to an increase in debt trading and underwriting in the investment banking unit. J.P. Morgan also increased credit reserves by $4.2 billion, reflecting a Tier 1 capital level of 11.3%. This Tier 1 level ratio remains strong at 9.2% when excluding the TARP money. This should act as a valuable buffer, soaking up any future losses, and is expected to be able to lead J.P Morgan safely through economic conditions that could remain very challenging. Many of these earnings have been called into question, citing the cheap access to money from the government as one of the reasons that earnings have been inflated. Despite numerous other question marks stated in The Financial First Quarter , J.P. Morgans’ strong capital positioning has deemed its first quarter earnings to be legitimate and of strong caliber.
Independence
JPM has reaffirmed its intention to be totally separate from the government in its business operations. The CEO, Jamie Dimon, plans on re-paying the $25 billion as soon as possible. He quickly acknowledged his intention to pay the loan back the next day if necessary, but would wait to see what guidance and action is given by the government before hastily making any decisions. He plans on acting in the best interest of the shareholders as well as the economy. A positive aspect about J.P. Morgan repaying the money is that there will not be any need to raise funds, and it is prepared to get rid of this “scarlet letter.” It wants to be completely autonomous from the government and any negative connotations and government scrutiny associated with TARP. J.P. Morgan also plans on staying clear and free of any new government program relieving assets. However, J.P. Morgan may not have much control in this specific matter, as the government is not necessarily willing to accept the return of any money yet because doing so could hurt an already fragile economy, and probably give J.P. Morgan and Goldman Sach’s a strong advantage over their competitors. What is certain is that when the government finally does decide to take its money back, Mr. Dimon will be the first one in line, with his check book in hand.
Outlook
J.P. Morgan and the rest of the financial institutions are not by any means out of this recession. The questions of whether these companies can survive without government funds, and what actually will drive the rebound in the economy remains very important. Many investors like myself are awaiting the results of the stress test, which should come out the 4th of May. The banks themselves received this information on Friday, but the common shareholder will have to wait an additional week to receive the news. This test will thoroughly examine every banks balance sheet, and ensure that capital positions are sufficient for current business operations. Poor results due to vast amounts of debt could restrict the lending power of banks, and force another contraction in the economy. While some banks appear to be better positioned than others, poor results by any could be detrimental to investor confidence as a whole. The government should now know the complexity and severity of the financial turmoil, and expect additional aid or action immediately when one of these banks is not up to par.
-Joe Gallo
Disclosure: The Fund the author is associated with is long JPM and GS.
The Following Stocks Were Mentioned In This Article: BAC, C, GS, JPM
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