Banker's Wishful Thinking.

JPMorgan and Citigroup released 3rd quarter earnings with positive earnings growth from a year ago.  It doesn’t seem possible, payment deferrals, rent moratoriums, double digit unemployment rates and all. The Wall Street Journal’s David Benoit writes, “the two banks’ third-quarter results show that businesses and consumers held up surprisingly well in the months since the pandemic plunged the U.S. into recession. But the leaders of both banks warned that the economy isn’t out of the woods.”   

Benoit points out that the banks used a bit of financial hocus pocus to improve their earnings. “The results were boosted because the banks didn’t have to put aside as much money to cover future loan losses,” writes Benoit. Increasing loan-loss reserves is a direct hit to bottom line bank earnings, while putting away less toward future loan losses in relation to loan balances juices up bank earnings.   

It seems exactly the wrong time to assume the coast is clear. The heads of these mega banks may be issuing verbal warnings, but, watch what they do, not what they say. So, where’s their sunny outlook coming from? Mr. Dimon has always had the ear of Washington D.C. and he’s said on the earnings call, “A good, well-designed stimulus package will simply increase the chance we get better outcomes, but there is so much uncertainty we’re not saying that that’s definitive.”

Nancy Pelosi and Steve Mnuchin, Jamie Dimon would like you to help American’s debtors who owe JPMorgan, help him. 

WSJ’s Benoit then writes, “JPMorgan has nearly $34 billion ($33.8B actually] set aside for potential losses.” If the economy recovers apace, that might be $10 billion more than it needs, Mr. Dimon said. In a double-dip recession, he said, the bank could need another $20 billion in reserves.”

“The question [is] whether the bridge will be long enough and strong enough to bridge people back to employment and bridge small businesses back to normalcy,” JPMorgan Chief Financial Officer Jennifer Piepszak said. “I think it remains to be seen.”

JPMorgan’s Q3 financial statements indicate average loans for the quarter of $991 billion, that makes JPM’s loan-loss provision to be a healthy 3.4 percent. But then, there was this from Dimon, according to Benoit, “If the economy recovers apace, that [$34 billion] might be $10 billion more than it needs, Mr. Dimon said. "In a double-dip recession, he said, the bank could need another $20 billion in reserves.”

Twenty billion dollars ($20B) plus the $33.8 billion is a pile considering that JPMorgan wrote off just $1.18 billion in loans in the third quarter. JPM held $34.3 billion in loan loss reserve at the end of the 2nd quarter, the bank released $600 million in reserves to the bottom line, helping towards net earnings of $9.4 billion. 

JPM is trading at $100.83 today with a book value ((assets minus liabilities)/shares) of $63.93 or a price to book of 1.58.  

While Dimon stumped for more fiscal rescue. It’s not reported if he had a wish list for Jerome Powell.  Should there be a double dip, it may be that Mr. Powell and his army occupying the Eccles Building may go negative with interest rates, following Europe and now possibly England.

Almost Daily Grant’s reports “Then there’s the Bank of England, which has also set a 0.1% policy rate.  Unsatisfied with the results of the lowest rate in its 326 year history, the venerable institution appears to be clearing the groundwork for its own foray into the negative rate ether, asking commercial banks today (in tandem with the Prudential Regulation Authority) to assess their ability to operate under a NIRP regime.”

“A negative policy rate could have wider implications for your firm’s business and your customers,” PRA chief Sam Woods said in the letter.

ADG makes the salient point of what negative interest rates do to the value of banking stocks. 

“Experience has borne that out,” writes Philip Grant, “as Europe’s Stoxx Banking Index now trades at just 0.38 times book value, down from 0.81 times book at the end of 2013, six months before the European Central Bank took its deposit rate below zero for the first time.”

It’s a long way from 1.58x book value  to 0.38x book value.    

A long way down.