JPMorgan Chase
The company posted $4.69 billion in net income for the quarter which was above analysts' expectations of $3.6 billion. Revenue was $33 billion which was higher than consensus estimates of $30.3 billion. The bank also set aside $8.9 billion in expected losses on its loans due to expectations of an increase in defaults.
Trading revenue more than made up for any weakness in banking, as it increased by 79% compared to the same quarter in 2019 and accounted for $9.7 billion in profit. Most of the gains were from fixed-income trading. Banking posted a loss of $176 million. In contrast, it made a profit of $4.2 billion in 2019.
Stock Price Impact
Following its reports, JPMorgan's shares opened about 1% higher, paring a 5% initial pop after results were first announced, as traders digested the numbers. While the firm's trading profits are impressive, they are most likely a one-off due to the Federal Reserve's interventions in the corporate bond market which led to a rapid recovery in that asset class.
The direction of its stock will ultimately be determined by the economic fortunes of its customers and clients. However, this is largely dependent on the coronavirus situation. If unemployment remains high, then it's only a matter of time before businesses and people are unable to pay their debts.
Another negative factor for banks is the interest rate situation. Typically, banks borrow on the short-end of the curve and lend on the long-end. This is most profitable when there's a steep curve. Today, the curve has collapsed. Today, the 3-month Treasury is yielding 0.15%, and the 10-year Treasury is yielding 0.63%. Even 10 years ago when the Fed was first implementing quantitative easing, the 3-month note was yielding 0.15%, and the 10-year Treasury was yielding 3.50%.
JPMorgan is a global bank with diversified, revenue streams, so it will survive and find other ways to make money. However, other banks in the sector, primarily focused on banking, are going to struggle in this environment.
Financials have been major laggards over the last couple of years, and even more so, since the coronavirus due to the behavior of interest rates. If the economy were to start growing again, then it's possible that interest rates would normalize, and the banks would see major rallies. However, this scenario seems less likely today than a month ago due to the rising case counts which hinders any sort of recovery.
If you had to buy a bank, then JPMorgan is probably the best choice, as it has a solid balance sheet and pays a 3.7% dividend. Given that it'll emerge from the crisis in a strong position, it will likely have a number of opportunities to grow its business at the expense of weakened competitors.
