The financial media was caught like a deer in the headlights Friday morning, staring into the bright glow from JPMorgan Chase and Co.'s (NYSE:JPM) latest financial results. The headline number, an increase of 34 percent in year-over-year quarterly earnings on higher revenue, was immediately seized as proof that the largest U.S. bank by assets remains untouchable.
At the New York Times, Jessica Silver-Greenberg noted the results showed "strength in consumer and corporate lending." TheStreet.com called it "a very strong third-quarter bottom line." Meanwhile, the Associated Press highlighted the words of JPMorgan CEO Jamie Dimon that he believed the results were driven by a housing market that had "turned a corner."
The consensus, echoeing the words of Dimon Friday, who noted "strong performance across all our businesses" but focused on gains from mortage underwriting, was clear: JPMorgan might have only recently been on the news for reckless betting at its in-house hedge fund that led to multibillion- dollar losses, government lawsuits alleging massive fraud in its mortage subsidiary, and the indignity of having its CEO hauled in to testify before Congress, but this bop clown of American finance had taken all the punches and was back on its feet.
Perhaps the rest of the media was reading a different report, as it appears to this humble reporter that even a cursory look at the bank's financial statements reveal the just-ended period everyone seems to be fawning over was far short of the tomahawk dunk of a quarter everyone is making it out to be.
First, the actual numbers.
JPMorgan did report income for the just-ended three months of $5.7 billion, over a third more than year-ago earnings of $4.26 billion. But nearly the entirety of the difference between those periods came on reduced provision for loan losses in its residential mortgage portfolio, which gave the bank a $900 billion earnings boost and the fact the firm was able to stop losing money from trades in its corporate account as it wound down operations there following large losses in the previous quarter. In other words, nearly all of the bank's gains came on an accounting maneuver and the fact an internal unit is getting smaller.
More importantly perhaps, while performance of various bank units was better than the dismal third quarter of 2011, when the entire financial sector took a hit on highly volatile financial markets, income from the most profitable units actually declined substantially from the previous quarter.
Profit from the company's investment bank, the largest unit, declined by 18 percent when compared to the previous quarter, even after a $48 billion benefit from lower provisions for credit losses was factored in. The bank's second-largest unit, retail financial services, also saw a steep sequential drop in profits of 38 percent, something that seemed to be overlooked by analysts touting the increase in mortgage underwriting within that unit. Profits on the bank's credit card and auto loan book also dropped from last quarter, hit by changes in rules on how to account for certain types of delinquent loans.
And income numbers were only part of the story. One quickly overlooked metric in JPMorgan's earnings release showed net exposure to the highly-volatile peripheral economies of Europe nearly doubled in the quarter, going to $11.7 billion from $6.2 billion. The ratio of deposits-to-loans went from 1.53 last quarter to 1.53, and its net interest margin declined, a reflection of increased deposits with the bank, but also a sign that JPMorgan, as the company noted itself on the investor presentation accompanying the release of results is finding "limited reinvestment opportunities."