JP Morgan delivers scintillating performance

Abraham George Market Musings

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As expected, JP Morgan hit the ball out of the park with their earnings and revenues. Since the depths of the pandemic, the biggest bank in the country has beat their own performance for six consecutive quarters.

In the past, we had discussed about the war chest of loan loss reserves that the banks are sitting on and building up, all that can be converted to net income whenever they wanted to. We can safely assume the next major financial crisis may not be coming from the banking sector. JPM has moved a little over $2 billion to the bottom line for third quarter. They still have another $6 bio remaining that can be moved to the bottom line. With that pre-pandemic comparison in mind, JPM has now generated $ 50 billion in net income over the past four quarters. That’s $14 bio more (about 38% higher) than the record level profits of 2019.

The story should be similar for the other major four (may be not that good for Wells Fargo, though).

So, what is the real cause of all this? For the past 19 months, the Fed has been the real backstop for risk taking by the banks. It is no wonder that JPM deposits are up 20% compared to the record levels of last year, investment assets are up 29%, investment banking fees are up 60% and wealth management assets are up 17%.

The banks are profit printing machines and will continue to be so for the foreseeable future. Apart from JPM the other three have also have beaten earnings and revenue expectations. The expected rising interest rate environment should also act as tailwinds for the banks. With the war chest of loan loss reserves, bank stocks are still a great buy.

As I have stated before, the Fed has a dual mandate of achieving full employment and maintaining price stability. All along, the Fed has downplayed the inflation fears by saying that it will be ‘transitory’. We have always argued the Fed will be wrong on this and they will turn to be fire fighters. Very soon, you will start seeing their tone changing to be more aggressive and quicker than the majority of what Fed officials have publicly stated so far. All other evidences are pointing to much hotter and sticky inflation down the pipeline. Producer prices have risen to the highest level from China in more than a quarter century. You are unlikely to get anything from China in the timeline that you have got before and even if you are lucky to get it freight prices are going to be almost four times more than what US would have paid a year ago.

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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.

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