When a giant company like JPMorgan Chase reports earnings, there are two ways to read the results. One is what it signals for the company itself, the other is what it signals for the global economy at large.
When it comes to the first reading, things seem to be humming along just fine. Most notably: The bank has been able to shrink in size effectively while still increasing full-year profit to a record. Total assets fell 9 percent in 2015, to $2.35 trillion, and revenue slipped 2 percent. Full-year net income, on the other hand, increased 12 percent, to $24.4 billion, amid cost cuts.
The type of assets the bank cut is what's important -- about $200 billion in non-operating deposits. These are cash balances that regulators fear will vanish during a period of financial stress, so basically anything above what's needed to meet a company's coming obligations. The bank also shed a serious amount of over-the-counter derivatives and illiquid assets. It all allowed JPMorgan to cut the capital buffer required as a "global systemically important bank" to 3.5 percent in the fourth quarter from 4 percent in the third quarter, a nice surprise for investors.
That's an impressive feat and gives CEO Jamie Dimon a few more gold stars on his legacy that can maybe cover up a few of the blemishes from the London Whale and a long list of legal entanglements.
The second way to read the results, however, is arguably more interesting -- and more important. A big concern is that the debt markets are deteriorating beyond the obvious weakness in oil and gas producers, and conditions could get worse if the Federal Reserve follows through with more interest rate increases. As a headline on a column by Gadfly colleague Lisa Abramowicz put it recently: "You Can't Hide From Junk-Debt Slump by Shunning Energy."
As she pointed out:
Standard & Poor’s said on Tuesday that the outlook for corporate borrowers worldwide was the worst since the global financial crisis, with potential corporate downgrades outpacing possible upgrades by the most since 2009.
This is the opinion the market seems to be taking. Junk-bond exchange-traded funds, for example, this week returned to the lowest levels since 2009 after looking like they found a bottom around the turn of the year.
JPMorgan, however, seems to be taking a "what, me worry?" stance. Provisions for credit losses did increase substantially, to $1.3 billion, up 49 percent from the fourth quarter of 2014. But the eye-popping increase was largely due to two things: the bank released reserves in the previous quarter, and the rout in commodity markets prompted it to set aside $124 million for potential losses in its oil and gas book and $35 million for metals and mining. (Mike Mayo of CLSA even questioned whether the energy provisions were enough and asked whether Dimon worried the bank would one day say, "Whoops, we didn't get ahead of this enough.")
Provisions for losses ebb and flow depending on how conservative the bank had been in bracing for losses in the past that weren't as bad as forecast. When it comes to its total allowances for loan losses, the number has actually shrunk 4 percent since the end of 2014, to $13.55 billion, even as loans increased 11 percent.
The state of credit markets was a hot topic on the conference call, with analysts asking about the disconnect between the bank's view and the growing consensus.
Dimon didn't mince words. He said that the condition in the credit-card and corporate debt business was "as good as it's ever been" and that the bank was not forecasting a recession that would trigger serious deterioration. This echoed some comments he made earlier in the week to Fox , when he said that “mortgages are pristine,” that “consumers are in increasingly good shape" and that Fed rate increases are a positive. Chief Financial Officer Marianne Lake said that she expected charge-offs to remain low and that there's been "nothing particularly thematic yet" in the portfolio outside of the ugliness in energy and metals and mining.
Could this be a spin job to make the bank appear dominant, or arouse some confidence in debt markets? Maybe, though the place for spin is interviews and conference calls, not balance sheets -- especially those of the "fortress" variety. Or could JPMorgan just simply be wrong? Maybe. But taking a view that's contrarian to Dimon's has always been risky, even when he's the one being contrarian.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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