http://www.zerohedge.com/news/2013-10-11/jpm-hammered-massive-92-billion-legal-expenses-posts-first-loss-under-dimon-takes-16
Submitted by Tyler Durden on 10/11/2013 07:42 -0400
http://www.zerohedge.com/news/2013-10-11/wells-crippled-mortgage-pipeline-shutdown-net-interest-margin-slides-reserve-release
Submitted by Tyler Durden on 10/11/2013 08:56 -0400
JPM Hammered By Massive $9.2 Billion In Legal Expenses, Posts First Loss Under Dimon; Takes $1.6 Billion Reserve Release
So much for the JPM "fortress balance sheet." Moments ago the bank which 18 months ago stunned the world with the biggest prop trading loss in history, just reported its first quarterly loss under Jamie Dimon, missing expected revenue of $24 billion with a print of $23.88 billion, but it was net income where the stunner was in the form of a $0.4 billion net income. The reason: the fact that from the government's best friend, Jamie Dimon has become the punching bag du jour, and having to pay $9.15 billion in pretax legal expenses, the biggest in company history.
Quote Jamie Dimon:
While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense. We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.
Speaking of "strong underlying performance", considering that the other key component of Q3 net income was a whopping $1.6 billion in loan loss reserve releases, one wonders just how truly strong Q3 earnings really were. But of course, this being Wall Street, all negative news is "one-time" and to be added back. Which is why JPM promptly took benefit for all charges, which means adding back the $7.2 billion legal expense and $992 MM reserve release after tax benefit. In short: of the firm's $1.42 in pro forma EPS, a whopping $1.59 was purely from the addback of these two items.
Total loan loss reserves declined by $1.8 billion to $17.6 billion, well above the release taken a year ago which was "only" $1 billion. The problem for JPM is that its pool of eligible loan losses is starting to rapidly dry up, and at the current pace of ~$1.5 billion per quarter, the firm has about three years of EPS-goosing release padding left.
Nonetheless, and certainly for the near term, JPM is quite clear: expect reserve releases to continue padding our bottom line:
Additionally when looking for the "strong" performance, one fails to find it in the Fixed Income Markets line item, where much of the pain was expected to be today, which indeed dropped by $0.3 billion or 8% compared to 2012, down to $3.4 billion, however offset by a modest $0.2 billion increase in Equity Markets to $1.2 billion. Also notable was the drop in the average VaR from $122 in Q3 2012 to just $45 this quarter. More Excel copy/paste errors?
Going back to the firm's unprecedented legal troubles, below is a chart showing the firm's record $28 billion in net litigation reserve additions since January 2010. Expect this number to continue rising. Of note: this may not be enough since as the firm notes there is an additional $12.5 billion in possible losses in excess of reserves for just Q2 and Q3 alone. In other words, expect many more billions in legal losses in the quarters ahead.
Next, for all those predicting a surge in bank Net Interest Margins as a result of the spike in Q3 yields, we challenge anyone to show it to us on the following chart showing that for all intents and purposes, JPM's NIM just dropped to an all time low.
Finally all those curious what JPM's most recent European exposure is, the chart below should answer the question.
Full earnings release:
http://www.zerohedge.com/news/2013-10-11/wells-crippled-mortgage-pipeline-shutdown-net-interest-margin-slides-reserve-release
Wells Crippled By Mortgage Pipeline Shutdown: Net Interest Margin Slides, Reserve Release Soars
Take all the talk about how "soaring" (to below 3%) rates will not impact housing, or that rising rates are great for banks because they help boost Net Interest Margins, and dump it in the trash. Why? Exhibit A - Wells Fargo, the bank which is most reliant on the housing market (unlike such prop trading powerhouses as JPM and Goldman) to generate revenues (which missed expectations) which just announced its Q3 earnings. The numbers of note were not among the fudged top or bottom-line headline grabbers. They were far uglier, and were as follows.
First, in order to "beat" the EPS of $0.97, with an EPS $0.99 print, or $5.6 billion, the bank was forced to dig deep in its bag of accounting gimmickry and pull out a whopping $900 million in loan loss reserve releases, driven by a $1 billion net charge off number, offset by just $0.1 billion in provisions: at least the latter number was not negative. This was the highest release since 2011 and a surge compared to recent trends.
Next, remember how every pundit was jumping on their head proclaiming that as a result of soaring rates, Net Interest Margins would explode higher leading to an EPS boost? Well, as usual, the experts were 100% wrong. At 3.38% this was the lowest ever, and also well below the 3.43% expected. Oops.
But the biggest pain was in the company's pure play primary line of business: mortgage origination. And as we have been pointing out all quarter, as a result of a 100 bps jump in rates since the taper talk in Q2, consumers' propensity to begin the mortgage pipeline, has plunged. Sure enough, Wells was kind enough to point that out moments ago, when it said that its Q3 mortgage originations were a multi-year low $80 billion, or a 29% drop sequentially, and a massive 42% Y/Y.
So: what is this housing "recovery" (aside from the foreclosure stuffing, the offshore money laundering, and the now finished REO-To-Rent scheme) everyone keeps talking about again?
Source: Wells Fargo
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