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JPM Earnings

01/13/2012

A strong start to 2012 for the financial sector has surprised the market. Heading into Friday, January 13, the XLF was the leading ETF of the nine major sector SPDR ETFs many investors use as a benchmark.
 
A few quick points on why financials have exhibited such early strength:
 
1.  Money managers were positioned well below historical benchmarks heading into 2012, burned by early last year’s “overweight” punt.

o   In particular, the negative sentiment surrounding European sovereign debt exposure in the fall of 2011 motivated money managers to actually underweight banks.

2.   The late 2011 introduction of the European three-year LTRO program has restored confidence in the credibility of counterparty risk.
 
3.    A modest improvement in U.S. labor conditions and the chatter surrounding any potential QE3 focusing on the ills of housing has modestly raised the incredibly low expectations for financial earnings.
 
JPM Earnings:
 
•      Q4 profit down 23% at $3.73 billion or $0.90 per share versus last year’s  $4.83 billion or $1.12 per share
•      Shares will struggle with the deeper fall in investment banking revenue, $4.36 billion versus CEO Jamie Dimon’s December “essentially flat” comment relative to Q3’s $6.37 billion

o   Fixed income and equity market revenue was $3.27 billion, down from Q3’s $4.75 billion 

•      Retail banking earned $533 million, a drop off 54% from Q3
•      Loans at least 30 days overdue fell to 1.13% from 1.22% in Q3
•      Actual write-offs fell to 4.29% from 4.7% in Q3
•      Commercial loans grew 4.3% following up on Q3’s 4.6% (keep in mind, Q4 2010 was 0.8%)
•      There is an impact in these numbers from the Durbin amendment which took effect October 1
•      From the conference call – CEO Dimon, “We have plenty of capital, we don’t need more.”
  
 
COMMENTS: Credit conditions continue to improve for JPM and the banking industry. The balance sheets of large-cap banks are on solid footing in an attempt to quickly comply with Basel 3. I do not expect the upcoming stress to be a headwind at all; if anything, it will be a tailwind. Dividend and share buybacks will quickly follow the “all pass” results. I continue to maintain that investors seeking exposure to any banking recovery should look first to the debt markets for opportunities.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.