As the coronavirus pandemic continues to shake the global economy and financial markets, all eyes are set on JP Morgan that will kick off the US first-quarter reporting season next Tuesday. The first-quarter earnings report of the largest investment bank in the world is going public on April 14th, leaving only a few days to see whether it will beat the cut-off estimates.
The US megabank is expected to hit $27bn in first-quarter revenue, a 0.5% slide year-on-year, with earnings per share flat on a year ago at $2.65, according to data gathered by LearnBonds.
A Fall After Record Q4 Earnings
JP Morgan’s investment banking revenues were booming in fourth-quarter, jumping over 30% year-on-year. The record earnings at the end of the last year were driven by the bond trading revenue, which surged 86% to $3.4bn value.
Analysts say it is unlikely to sustain this rise with financial markets tanking and merger and acquisition drying up over the last three months. However, JP Morgan’s chairman and chief executive Jamie Dimon revealed in his annual letter to shareholders that, surprisingly, the first quarter of 2020 will be the largest quarter for investment grade issuance.
Investment director at AJ Bell Group, Russ Mould, estimates that JP Morgan’s commercial and consumer & community banking (CCB) units are even of greater concern. Even before the coronavirus outbreak, commercial banking revenues were falling three years in a row, while CCB marked the slowest growth since the second quarter of 2017. Mould also points out to bank’s provision for credit losses, as a reliable indicator of a possible downturn.
With a set of other measures to help their clients, JP Morgan extended $950m in new loans to small businesses to support them during the crisis in the past 60 days alone. The bank also continued to maintain undrawn revolving commitments in their wholesale businesses, which totaled around $295bn as of the close of business on 31 March.
JP Morgan’s Jamie Dimon said: “Companies have already drawn down more than $50bn of their revolvers to prepare themselves for the crisis, which dramatically exceeds what happened in the global financial crisis. Many others have requested additional credit, and more than $25bn of new credit extensions were approved in March alone. Recognizing the extraordinary extension of new credit and knowing there will be a major recession means that we are exposing ourselves to billions of dollars of additional credit losses as we help both consumers and business customers through these difficult times.”
The Effect of Suspend Share Buybacks
JP Morgan, along with seven other major lenders, has agreed to suspend share buybacks until at least the summer. AJ Bell investment director Russ Mould points this removed one way of boosting earnings per share and moved to the debate on to the dividend, where JP Morgan’s quarterly distribution is running at $2.8 billion, a quarter.
Jamie Dimon explained: “Halting buybacks was simply a very prudent action – we don’t know exactly what the future will hold – but at a minimum, we assume it will include a bad recession combined financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress.”
However, the Comprehensive Capital Analysis and Review (CCAR) results for 2020 should prove that the US financial giant is prepared to face a severe economic shock. Even in the extremely adverse scenario that assumes a 35% fall in the gross domestic product in the second quarter, with US unemployment peaking at 14% in the fourth quarter, the company would still end the year with strong liquidity and a common equity tier ratio of approximately 9.5%.
JP Morgan’s CEO Jamie Dimon said: “This scenario is quite severe, and we hope, unlikely. If it were to play out, the Board would likely consider suspending the dividend even though it is a rather small claim on our equity capital base. If the Board suspended the dividend, it would be out of extreme prudence and based upon continued uncertainty over what the next few years will bring.”