What Investors Didn’t Like in JP Morgan’s Earnings Report Precisely?

According to Bloomberg, JPMorgan (JPM) dropped the most since 2020 on plan for a big spending hike. No matter what was the true reason for that counterintuitive move, that signifies a rather troublesome quarter for the U.S. stocks despite positive earnings expectations.

The bank published its quarterly earnings on Friday with overall Q4 numbers beating consensus, helped by a release of a $1.8 billion net reserves, elevated capital markets activity, and a pick-up in lending. Unfortunately, Q4 EPS of $3.33 fell from $3.74 in Q3 2021 and $3.79 in the year-ago quarter. Provision for credit losses was a benefit of $1.29 billion, down from a benefit of $1.53 billion in Q3. Return on tangible common equity was 19% vs. 22% in Q3.

Bloomberg stated that JPM’s expenses in Q4 2021 rose 11% on an annual basis, and the bank said they expect them to rise to about $77 billion this year excluding legal costs, which would be an 8.6% additional increase. Fixed-income trading revenue slid 16%, worse than the 13.5% decline analysts had been expecting. Total trading revenue fell 11% against the 9% estimate. While the fixed-income business shrank the most, equities revenue also declined, falling 2% to $1.95 billion. Underwhelming results of its trading division and muted loan growth added to pressure on the company’s stock.

On the other hand, the company’s M&A division drastically outplayed all other ones. M&A fees rose 86% in Q4 2021, to $1.56 billion, higher than consensus estimate, helping push the firm’s net income to $10.4 billion, compared with expectations for $9 billion. JPMorgan ranked second in overall M&A market share during 2020's $5 trillion transactional spree.

In terms of the bank’s overall sustainability, JPMorgan's stress tests point to its equity Tier 1 RWA yearend projection at 11.2%, which is greater than the required 4.5%. The bank's general Tier 1 equity ratio projection of 12.9% also exceeds the required benchmark of 6%.

Shares of JPM were down 6.15% to $157.89 at Friday’s U.S. market close in New York, paring the gain in the past 12 months to 11%. That compared with a 32% advance for the broad-market KBW Bank Index in the same period.