The Good, the Bad and the Ugly in JP Morgan’s 1Q20 results

    Forget the GAAP 79 cents 1Q20 EPS on the income statement and focus on the balance sheet.


    JP Morgan just reported their 1Q20

    results and here is our run down.

    • Tangible Book Value Per Share is $61, little changed from last quarter. The stock is trading at $95. The difference is the minimum overvaluation of JPM. The reason is that we are entering a mega world depression and all that provision for credit losses is going to hit there.

    Allowances  for the Credit Card 💳 portfolio increased from $5.6B to $15B. Provision increased from their community bank portfolio increased from $1.2B to $5.7B. Ok some semantics here. You provide for a loan when the credit risk has increased substantially, as they are on Basel. The difference between the allowance and the provision basically means that the bank is expecting things to get a whole lot worse. ( That’s a really simple explanation and avoids the entire issue about contra assets and things like that. Remember we are dealing with Politicians, big game decision makers and not microscopic Accountants.)

    Accrued interest on JPMs loan book increased from $72B to $122B. So what does this mean? In normal times, there is a timing difference between when the bank actually gets paid from the time it recognises it as revenue. So for example, you have a loan for $100 that is charged a monthly interest rate of 1.00%. The bank closes its books at the end of the month and records the $1 of interest as interest income. But you pay the $1 on the 15th of the next month. From the 1st to the 15th, this $1 is carried as accrued interest and when you pay your $1, it ceases to become accrued interest and becomes cash. During normal times, this figure is quite constant and in JPM’s case, it ranged from $70B to $90B over the last 1 year. Now it’s $120B from $70B. Is it a bad thing? Quite possibly if you make the hypothesis that a lot of it is from interest on interest. If that is the case and those loans turn bad then the extra $50B accrued will become a $50B write off.

    • Credit quality slipped a bit but that is a lagging measure. After all, a bank will only know if you defaulted 90 days from now. But the good thing is that it did not look bad. But this is a lagging measure. Which means that it will hit in 3 Mths time.

    For now.

    WeWork is practically insolvent based on its financials. In 2019 it lost $2b.

    And WeWork has not defaulted yet and with that collapsing the New York commercial office space. For now, as well.

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