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JPMorgan Beats But Stock Slides As FICC Revenue Disappoints, Compensation Jumps

JPMorgan Beats But Stock Slides As FICC Revenue Disappoints, Compensation Jumps

JPMorgan has officially kicked off the 4th quarter when it…



This article was originally published by Zero Hedge

JPMorgan Beats But Stock Slides As FICC Revenue Disappoints, Compensation Jumps

JPMorgan has officially kicked off the 4th quarter when it reported earnings at 645am ET, which beat on the top and bottom line, but contained a handful of gimmicks, some weaknesses in key divisions, and as a result the stock is down about 3% in the pre-market.

Starting at the top, the largest US commercial bank reported Q4 adjusted revenue of $30.35 billion, down modestly from Q3 2021 and up $0.2BN from a year ago, as noninterest revenue declined both sequentially and quarterly, offset by increases in net interest income. This translated into net income of $10.4BN, down $1.3BN sequentially and down $1.7BN annually, translating in $3.33 EPS, which also dropped M/M and Y/Y but beat expectations of $3.01

And while reporting another solid quarter, JPM’s EPS has now declined for three consecutive quarters.

Also of note: some $1.8 billion of JPM’s bottom line came from credit loss reserve releases, the bulk of which of $1.4BN was concentrated in the consumer card business. The decline in releases brought JPM’s total reserves to $18.7BN, down from $20.5BN. Separately, recovery of credit losses dropped 32% Y/Y to $1.29 billion. Net charge-offs dropped by 48% to $550 million, below the estimate of $745.6 million and most of that was driven by their card business. This indicates that JPM is quite confident in the strength of the US consumer and it’ll be key to hear what they think it means about the US economy in today’s call.

Some more details from the quarter:

  • Managed Net Interest Income $13.71B, Est. $13.47B
  • Managed overhead ratio 59%, estimate 57.7%
  • Standardized CET1 Ratio 13%, Est. 12.9%
  • Return on tangible common equity 19%, estimate 17.4%
  • Return on equity 16% vs. 19% y/y, estimate 13.9%
  • Assets under management $3.1 trillion, estimate $3.07 trillion

Here’s Jamie Dimon describing the quarter with a relatively long quarter: “JPMorgan Chase reported solid results across our businesses benefiting from elevated capital markets activity and a pick up in lending activity as firmwide average loans were up 6%. The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks. Credit continues to be healthy with exceptionally low net charge-offs, and we remain optimistic on U.S. economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth.”

He continued:

“Global IB fees were up 37%, driven by both the Corporate & Investment Bank and Commercial Banking, due to unprecedented M&A activity, an active acquisition financing market and strong performance in IPOs. Markets revenue was down 11%, compared to a record fourth quarter last year, but up 7% versus the 2019 quarter driven by a strong performance in Equities. Asset & Wealth Management delivered robust results as we saw positive inflows into long-term products of $34 billion across all channels and regions, as well as continued strong loan growth, up 18%, primarily driven by securities-based lending. In Consumer & Community Banking, client investment assets were up 22%, with growth from higher market levels and positive net flows. Combined debit and credit card spend was up 26%, supporting accelerating Card loan growth, up 5%. Auto loans remain elevated, up 7%, although a lack of vehicle supply slowed originations to $8.5 billion, down 23%. Home lending had another strong quarter with originations at $42 billion, up 30%.”

Here, as Bloomberg notes, Dimon’s trying to warn investors that this is all slightly driven by how crazy good 2020 was for trading. In his quote, he notes that trading revenue was down in 4Q 2021 compared to 4Q 2020. But when compared to that period in 2019, revenue was actually up 7%. So last year’s trading bonanza really made for some tough comparisons this year, but based on JPM shares at the moment, that could be driving sentiment down still.

Continuing with what actually matters, we focus on the bank’s corporate and investment bank, where FICC sales and trading revenue dropped 16%, and posted a surprising miss, even as equity sales and trading, investment banking, and advisory revenues all beat expectations:

  • FICC sales & trading revenue $3.33 billion, -16% y/y, missing the estimate $3.42 billion
  • Equities sales & trading revenue $1.95 billion, -1.8% y/y, missing the estimate $1.98 billion
  • Investment banking revenue $3.21 billion, up a whopping 28% y/y, vs estimate $3.08 billion
  • Advisory revenue $1.56 billion, estimate $1.32 billion
  • Equity underwriting rev. $802 million, estimate $916.8 million
  • Debt underwriting rev. $1.14 billion, estimate $1.03 billion

And visually:

Some commentary from the bank:

  • Banking revenue was up 28% YoY to $3.2BN, with IB fees up 37% YoY, predominantly driven by higher advisory fees
  • Payments revenue up 26% YoY to $1.8B, or up 7% excluding net gains on equity investments, predominantly driven by higher fees and deposits, largely offset by deposit margin compression
  • Lending revenue was up 36% YoY to $263mm, driven by lower mark-to-market losses on hedges of accrual loans compared to the prior year
  • Fixed Income Markets revenue of $3.3B, down 16% YoY, “driven by a challenging trading environment in Rates, as well as lower revenues in Credit and Currencies & Emerging Markets compared to a strong prior year”
  • Equity Markets revenue of $2.0B, down 2% YoY, “driven by lower revenue in derivatives, largely offset by higher revenue in Prime.”

And while total banking revenue rose, so did costs: expense of $5.8B, was up 18% YoY, predominantly driven by higher compensation expense, including investments, as well as higher volume-related brokerage expense and higher legal expense.

In fact, expenses overall were concerning, and in Q4, JPM’s non-interest expense was $17.9 billion, up 11%. For the full year, expenses totaled $71.3 billion, which is pretty close to the $71 billion estimate that management had guided to although just slightly higher.

One wonders how much of this is due to higher compensation, and by extension will this lead to a margin compression discussion about the bankers. As Bloomberg notes, “expenses are probably going to be a huge topic today just as we work to get a sense of how the bank expects to manage its costs going forward.”

Digging into JPMorgan’s asset and wealth management unit, better known as AWM, we find that net income of $1.1 billion was up 46%. Net revenue was $4.5 billion, up 16%, because of “higher management fees and growth in deposits and loans.” Note that loan growth! Note also it was “partially offset by deposit margin compression.”

Then there is the commercial banking unit, where the highlight was that while average loans rose sequentially by a modest 2% (and were still down 3% Y/Y) to $206BN, deposits continued to surge, tracking the Fed’s QE, and were up 8% Q/Q, and up 17% Y/Y to an average deposit number of $324BN. Overall, JPM reported that total loans rose to $1.08 trillion, beating the estimate $1.05 trillion; but total deposits also beat expectations printing at $2.46 trillion, above the estimate of $2.42 trillion.

Looking ahead, the bank is guiding toward net interest income minus the NII from the markets business of $50 billion, which would be up from $44.5 billion this year. That’s from a combo of higher rates and “high single-digit loan growth” as credit card revolving balances return to 2019 levels plus some securities deployment.

While that is a solid improvement to 2021, it is well below the 2019 levels of $54.7 billion, so investors may have concerns about what is holding NII back.

Separately, JPM still target 17% ROTCE as its “central case” in the medium term. That’s despite some short term headwinds, but includes an outlook of some modestly higher rates and loan growth coupled with more normalized capital markets activity and some expense growth.

Perhaps the most interesting slide in the earnings presentation, JPM cited an adjusted noninterest expense figure of $70.9 billion for 2021 and say that should climb to $77 billion in 2022.

The biggest aspect of that increase is expected to come from investments, which could be a good thing depending on how adept you think this management team is at figuring out what businesses to deploy capital into. If not, then as Bloomberg notes, that’s a pretty solid increase in expenses.  The next biggest chunk of that increase, $2.5 billion, comes from a normalization of T&E and compensation. Honestly compensation might be more of a topic than it’s really ever been for the bank just given Dimon’s comments earlier about how there’s a lot of pressure on wage growth and a huge battle over talent these days.

Commenting on this number, Bloomberg Intelligence’s senior global banks analyst Alison Williams writes that “JPMorgan’s expense guidance of $77 billion vs. $73 billion consensus may weigh on the stock, with the bank potentially to earn a bit less than its 17% medium-term ROTCE target in 2022. Higher costs to compete are weighing. Banks should and are investing in the long-term, but competition may be adding to expense levels. Expected growth in 2022 includes $3.5 billion of investment spending and a $2.5 billion increase in structural costs related to compensation and normalization of T&E.”

As noted above, expenses are “the big thing that stands out,” according to Vital Knowledge’s Adam Crisafulli, who cites higher-than-expected 4Q operating costs, and a worse-than-expected efficiency ratio, plus 2022 guidance for $77b in expenses versus Street estimates of ~$72b.

“The expense issue will be the main highlight by far for JPM (and probably the whole industry and perhaps the whole market as increased expenses/compensation is one of the tape’s largest fears).”

He also calls other aspects of the quarter mixed, with a big credit benefit –which investors will dismiss, along with soft FICC trading, solid investment banking fees, and decent loan growth.

Commenting on the earnings, Octavio Marenzi of consultancy Opimas LLC said the bank’s results “surprisingly weak,” saying they “were hampered by uncharacteristically poor expense management.” He cites an increase in non-interest expense that “looks difficult to justify.”

And judging by the stock drop in the premarket, traders agree.

Here is the full earnings presentation (pdf link here)

Tyler Durden
Fri, 01/14/2022 – 07:45

Author: Tyler Durden


France’s EDF Crashes Most On Record After Macron Demands Price Caps

France’s EDF Crashes Most On Record After Macron Demands Price Caps

Electricite de France SA, also known as EDF, is a state-owned electric…

France’s EDF Crashes Most On Record After Macron Demands Price Caps

Electricite de France SA, also known as EDF, is a state-owned electric utility company that the French government has instructed to sell power at a steep discount versus market prices to shield households from soaring electricity prices. 

The unprecedented decision could cost EDF $8.8 billion. Shares in the utility crashed as much as 25% (most on record) on the news and were trading -16% around 8.70 euros (as of 0640 ET). 

Francois Breton, a fund manager at Edmond de Rothschild Asset Management, told Bloomberg that EDF is “the first victim” of the country’s upcoming presidential elections in April. French President Emmanuel Macron is relatively unpopular, and the move to counter energy inflation by capping power bills is his attempt to win the support of households.

JPMorgan said the utility might have to raise capital on secondary markets to mitigate losses of selling discounted power. 

It’s “from heaven to hell” for EDF, with a tariff intervention, outages, and imminent capital increase, JPM commodity analysts wrote in a Friday note. The analysts said to avoid dip buying in the utility until the smoke settles. 

In other developments, EDF announced Thursday that several of its nuclear power plants would remain offline for longer than expected due to repairs. The shutdown will slash electricity output from reactors by 8%. Last month, multiple nuclear power plants went offline due to cracks in one reactor. 

Like many other European countries, France has been grappling with an energy crunch. The cap will only allow electricity bills for households to rise about 4% this year. The government is also slashing taxes on electricity worth around 8 billion euros to lower prices. 

Macron’s attempt to curb household inflation is a political move at the expense of a state company to improve his prospects for the presidential elections in April. 

We see a longer-term headwind for European utilities as the energy crunch on the fuel-starved continent shows no signs of abating as politicians are eager to do anything in their power to protect households from soaring electricity prices. 

Tyler Durden
Fri, 01/14/2022 – 08:00

Author: Tyler Durden

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CAD higher ahead of US retail sales

The Canadian dollar is in positive territory and continues to have an excellent week, with gains of 1.28%. The currency is back below 1.25 and is looking…


The Canadian dollar is in positive territory and continues to have an excellent week, with gains of 1.28%. The currency is back below 1.25 and is looking to close below this symbolic line for the first time since mid-November.

This week’s robust rally by the Canadian dollar is more a case of greenback weakness rather than loonie strength, as the US dollar has retreated broadly against the major currencies this week. Investors continue to be in a risk-on mode, shrugging off a soft nonfarm payrolls report and a sizzling CPI reading of 7.0% y/y. Fed Chair Jerome Powell managed to soothe concerns of runaway inflation earlier this week, saying that the Fed stood ready to raise rates to combat inflation but that he expected inflation to ease in later in the year. This has kept risk appetite high, but it’s questionable if investors will stay this optimistic if inflationary pressures remain at 40-year levels.

We continue to see a rotation out of US dollars this week, with the majors enjoying gains of around 1% against the retreating US dollar. The driver behind the US dollar’s weakness has been elevated risk appetite, which has not waned despite exploding Omicron cases, a soft nonfarm payrolls report and surging inflation in the US. Still, risk sentiment can change quickly, and I would not be surprised to see the US dollar recover in the near term if Omicron is more damaging than anticipated or if inflation heads even higher.

The week wraps up with US retail sales later today. The headline reading is expected to come in at -0.1%, and a decline could boost the Canadian dollar as it would put pressure on the Fed to hold back from normalizing policy. Investors will also be keeping an eye on UoM Consumer Sentiment, which is expected to drop from 70.6 to 70.0 points. A sharp drop in consumer confidence could raise expectations that the Fed will delay a rate hike, which would be bearish for the US dollar.


USD/CAD Technical

    • USD/CAD is testing support at 1.2513. Below, there is support at 1.2396
    •  There is resistance at 1.2762 and 1.2879

us dollar

Author: Kenny Fisher

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Research Review | 14 January 2022 | Inflation

The Time-Varying Relation between Stock Returns and Monetary Variables David G. McMillan (University of Stirling) November 2, 2021 The nature of the relation…

The Time-Varying Relation between Stock Returns and Monetary Variables
David G. McMillan (University of Stirling)
November 2, 2021
The nature of the relation between stock returns and the three monetary variables of interest rates (bond yields), inflation and money supply growth, while oft studied, is one that remains unclear. We argue that the nature of the relation changes over time and this variation is largely driven by shocks, with a change in risk associated with each variable shifting the pattern of behaviour. We show a change in the correlation between each of the three variables with stock returns. Notably, a predominantly negative correlation with bond yields and inflation becomes positive, while the opposite is true for money supply growth. The shift begins with the bursting of the dotcom bubble but is exacerbated by the financial crisis. Results of predictive regressions for stock returns also indicate a switch in behaviour. Predominantly negative predictive power switches temporarily to positive around economic shocks. This suggests that higher yields, inflation and money growth typically depress returns but support the market during periods of stress. However, after the financial crisis, higher inflation and money growth exhibit persistent positive predictive power and suggests a change in the risk perception of higher values.

Determinants of Inflation Expectations
Richhild Moessner (Bank for International Settlements)
December 2021
This paper analyses the determinants of short-term inflation expectations based on surveys of professionals, using dynamic cross-country panel estimation for a large number of 34 OECD economies. We find that food consumer price inflation and depreciations of the domestic exchange rate have significant positive effects on professionals’ survey-based inflation expectations. Moreover, core consumer price inflation and the output gap have significant positive effects.

The zero lower bound on inflation expectations
Yuriy Gorodnichenko (U. of California) and Dmitriy Sergeyev (Bocconi University)
January 11, 2022
Inflation expectations affect the decisions of households, firms, and policymakers. Expectations of negative inflation can be particularly harmful and lead to deflationary spirals when nominal interest rates are near zero. This column uses survey evidence to show that households and firms almost never expect deflation, even when it is a clear possibility. This apparent zero lower bound on inflation expectations has important implications for macroeconomic dynamics and the effectiveness of monetary policy. Unconventional policies, such as forward guidance, which aim to increase inflation expectations may be less effective when expectations are stuck at the zero lower bound.

The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23
Lutz Kilian and Xiaoqing Zhou (Dallas Fed)
November 1, 2021
Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, but only by 0.4 percentage points at the end of 2022. In contrast, the impact on measures of core inflation such as trimmed mean PCE inflation is only 0.4 and 0.3 percentage points in 2021 and 2022, respectively. These estimates already account for any increases in inflation expectations under the scenario. The peak response of the 1-year household inflation expectation would be 1.2 percentage points, while that of the 5-year expectation would be 0.2 percentage points.

Measuring U.S. Core Inflation: The Stress Test of COVID-19
Laurence Ball (Johns Hopkins University), et al.
December 1, 2021
Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices, has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded.

Feeling the Heat: Extreme Temperatures and Price Stability
Donata Faccia (European Central Bank), et al.
December 1, 2021
We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability.

The Rise of the Taylor Principle
Carlos Goncalves (IMF) and Bernardo Guimaraes (FGV)
December 9, 2021
We estimate the response of interest rates to inflation using data for 18 developed countries since 1915, within 30-year moving windows. Until 1972, interest rates are virtually insensitive to inflation. From then on, the interest-rate response to inflation starts to rise, and monetary policy responses get more heterogeneous across countries. In recent decades, all countries in the sample seem to abide by the Taylor Principle. We then take advantage of the observed policy heterogeneity in parts of our sample to estimate the effectiveness of the Taylor Principle. We run panel regressions of inflation volatility on the interest-rate response to inflation with country- and time- effects. We find that a stronger monetary policy response to inflation leads to lower inflation volatility.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return

By James Picerno

money supply
interest rates

central bank

monetary policy

Author: James Picerno

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