Results in the Bank

Second-quarter results from JPMorgan Chase and Morgan Stanley today showed enormous declines in the firms' investment banking businesses, market-volatility boosts to their trading operations, and management teams getting more cautious about the future—even if the present remains solid.

JPMorgan this morning said it earned $2.76 per share on revenue of $30.7 billion, versus the $2.89 per share and $31.8 billion expected by analysts before the report.

Net income of $8.9 billion was down by 24% from the same quarter a year earlier. It was dragged down by a $657 million writedown of JPMorgan's loans, and a $428 million addition to the bank's reserves for loan losses. The latter is money set aside in anticipation of potential defaults or uncollected payments on debt such as credit cards, mortgages, or business loans. It counts as an expense in the quarter it's recorded, but it's just cash moving around the balance sheet, not flowing out the door.

Banks set aside large loan-loss reserves in 2020 when the pandemic hit. A year later, as the V-shaped recovery took hold, many of those were reversed—adding to earnings. In the second quarter of 2021, JPMorgan released $3 billion from its reserves. That's a big year-over-year swing due to accounting rules.

In terms of fundamentals during the quarter, JPMorgan's trading fixed-income and trading revenues were up 15%, investment-banking revenues dropped 32%, and consumer banking revenues rose 9%. Total sales grew less than 1%, but were up year over year for the first time in the past five quarters.

Here's JPMorgan CEO Jamie Dimon summing up the current mood in this morning's earnings release:

In our global economy, we are dealing with two conflicting factors, operating on different timetables. The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.

But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.

We are prepared for whatever happens and will continue to serve clients even in the toughest of times.

Not what many wanted to hear from the CEO of the largest bank in America. Barron's Carleton English covered JPMorgan's results in detail here.

At Morgan Stanley, underlying trends were similar. Here's Carleton writing today:

The bank has fared well over the past two years thanks to a surge in initial public offerings and mergers. But this year’s market volatility has been less kind to investment bankers. Companies are reluctant to go public amid challenging market conditions. Meanwhile, merger and acquisition activity is drying up as buyers face higher costs due to rising interest rates while would-be sellers are reluctant to be bought at lower valuations.

Morgan Stanley doesn't have a huge consumer bank like JPMorgan's Chase. Its investment banking revenue fell 55% from the year-ago quarter, while equity trading rose by 5% and fixed income trading increased by 49%.

JPMorgan stock finished the day down 3.5%, while Morgan Stanley pared a larger loss to close down 0.3%. The SPDR S&P Bank exchange-traded fund (KBE), which includes bank stocks in the S&P 500, fell 1.5%.

Next up will be results from Citigroup and Wells Fargo tomorrow, with Bank of America and Goldman Sachs reporting on Monday.