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JPMorgan Chase (NYSE: JPM) reported record quarterly results this morning that blew expectations out of the water. This comes 48 hours after Goldman Sachs (NYSE: GS) did the same. What should you make of it all?
First, let's tear apart JPMorgan's earnings. Net income came in at $2.7 billion, or $0.28 per share on record net revenue of $25.6 billion, compared to $0.53 per share last year. Earnings were compressed by one-time charges totaling $0.37 per share related to TARP repayments and a special assessment by the FDIC. Average analyst expectations were for $0.04 per share, so this was a pretty solid performance.
But when you break down exactly where the net income came from, things aren't as impressive. Have a look at the different segments:
|
Segment |
Q2 2009 Net Income |
Year-Over-Year Change |
|---|---|---|
|
Investment Banking |
$1.5 billion |
273% |
|
Retail Banking |
$15 million |
(97%) |
|
Credit Cards |
($672 million) |
-- |
|
Commercial Banking |
$368 million |
4% |
|
Treasury & Securities |
$379 million |
(11%) |
|
Asset Management |
$352 million |
(11%) |
|
Corporate/Private Equity |
$808 million |
-- |
Investment banking was really the star here. Everything else was pretty bland, if not bad. There's nothing wrong with that, but it warrants a deeper dive.
Here's a further breakdown of the investment banking results:
|
Investment Banking Segment |
Revenue |
Year-Over-Year Change |
|---|---|---|
|
Advisory |
$393 million |
6% |
|
Equity Underwriting |
$1.1 billion |
104% |
|
Debt Underwriting |
$743 million |
(10%) |
|
Fixed Income |
$4.9 billion |
113% |
|
Equity Markets |
$708 million |
(34%) |
|
Credit Portfolio |
($575 million) |
-- |
So even within investment banking, the big gains were concentrated in two segments: equity underwriting and fixed-income markets. This shouldn't be too surprising -- equity underwriting went berserk as banks like Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) raised gobs of capital after the stress test, and fixed-income markets are minting money thanks to a favorable yield curve and little competition. These are the same forces that propelled Goldman earlier this week, and will probably carry over to Morgan Stanley (NYSE: MS) next week.
And just like Goldman, it's a blast while it lasts. But the skeptic in me has to think a lot of this quarter's investment banking profits were more or less one-off events that don't reflect long-term earnings power. The explosion in secondary equity offerings was really a once-in-a-lifetime event.
In short, I wouldn't take this quarter's earnings as proof that banks have returned to greatness. In the months and years ahead, the gusher of equity offerings will subside, and credit spreads could very well contract as big profits lure in more competition. Once that happens, investment banking segments won't have windfall profits to offset losses in consumer-based loan segments, which aren't out of the woods by any means.
By as I said with Goldman, hey, enjoy this while it lasts.
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