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JPMorgan Chase was the big winner in Q1

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Peter Garnry

Chief Investment Strategist

Summary:  The three major US banks JPMorgan Chase, Wells Fargo, and Citigroup have reported Q1 earnings all showing strong growth in net interest income and higher than estimated earnings. From a relative perspective it is clear from the deposit figures and provisions from credit losses that JPMorgan Chase was the big winner and the market reaction today is reflecting this. While the three banks are all mentioning that they have not tightened their credit conditions, Well Fargo says that consumer spending has softened in late Q1.

Net interest income growth pulls earnings higher

US equities are unchanged today but financials are up 1.2% driven by the banks industry group up 3.2% driven by better than expected results from JPMorgan Chase, Wells Fargo, and Citigroup.

JPMorgan Q1 earnings:

  • Adjusted revenue of $39.3bn vs est. $36.8bn – driven by higher net interest income
  • EPS $4.10 vs est. $3.38
  • ROE 18% vs est. 15.2% - outstanding return on capital
  • Provision for credit losses $2.28bn vs est. $2.31bn – no adverse developments in credit
  • Deposits of $2.38trn vs est. $2.33trn – sign that there has been an excess shift of deposits into larger banks
  • Sees a slight deterioration in economic outlook
  • CFO says “deposits in the financial system are shrinking because of the Fed’s quantitative tightening”

Wells Fargo Q1 earnings:

  • Revenue $20.7bn vs est. $20bn – driven by higher net interest income
  • EPS $1.23 vs est. $1.13
  • Deposits a bit below estimates suggesting Wells Fargo gained less deposits than JPMorgan during recent banking deposit turmoil
  • Has not changed its credit risk appetite
  • Deposit costs are climbing – this is due to investors moving into money market funds and other banks are competing for deposits
  • Provisions for credit losses $1.21bn vs est. $919mn – this suggests that economic conditions are worsening relative to estimates on the US west coast when we compare this figure with JPMorgan Chase
  • Sees consumer spending still strong but beginning to soften in late Q1 – this was also confirmed in today’s US March retail sales figures disappointing against estimates

Citigroup Q1 earnings:

  • Revenue $21.5bn vs est. $19.9bn
  • Adjusted EPS $1.86 vs est. $1.65
  • Deposits below estimates – again suggesting that Citigroup benefitted less than JPMorgan Chase from the banking turmoil
  • CEO Fraser says that current environment is not ideal for wealth management

Judging from the market reaction JPMorgan Chase was the biggest winner in Q1 by the big banks while Wells Fargo clearly was the biggest relative loser.

Tighter credit conditions or not?

An interesting comment from JPMorgan during the conference call was that the bank it not tightening credit yet, but the Conference Board US Leading Credit Index suggests that credit conditions are indeed higher than observed in most months since the Great Financial Crisis. While JPMorgan may not be tightening credit standards yet but the CEO Jamie Dimon said that people need to be prepared for higher rates for longer which will add to tighter credit conditions over time. Dimon also said on the call that the banks that could get into trouble could be counted on one hand and that many regional banks have sticky mid-market deposits. Next week we get the first test of Q1 earnings from US non-large financial institutions such as US Bancorp and Charles Schwab.

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