JPMorgan beat still could be bad for Wall Street

Oil Drums

Continued fallout from energy loans and sliding banking revenue could have disparate impact at other big banks.

JPMorgan Chase topped analyst estimates with earnings of $1.35 a share and revenue of more than $24 billion, but the investment bank's triumph over lower expectations shouldn't necessarily be viewed as positive news for Wall Street.

Every Wall Street bank saw reduced first quarter expectations to begin the year, in part thanks to a rocky start to 2016 on mergers and acquisitions and credit markets. But JPMorgan, which saw shares rise by more than 3 percent at the open Wednesday, could be an outlier for the banking sector and not a leading indicator.

The firm's investment banking division is better fortified from the deal downturn that began 2016, and trading losses and energy provisions were not as bad as Wall Street feared in February, when bank stocks were hammered by sliding oil prices. It remains to be seen if other banks can say the same.

"Earnings were certainly impacted by a slow start to the year in investment banking and markets," said Meghan Neenan, senior director for financial institutions at Fitch Ratings. "But other segments helped to partially offset that pressure, benefiting from loan growth and increased expense efficiencies."

The bank's reserves for credit losses expanded to more than $1.8 billion, compared with $959 million a year ago, reflecting additional reserves set aside for energy, metals and mining loans. But the bank's exposure to energy-sector borrowers could prove less painful than for other banks, which are exposed to more exploration and production companies and, in some cases, to lower-quality borrowers.

JPMorgan CFO Marianne Lake said on the bank's earnings call that it could still boost energy reserves further this year. Lake said that additional provisions set aside to cover challenged loans is "mostly related to oil and gas."

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The bank reported $1.3 billion in investment banking fees, down 25 percent year over year. It comes as M&A fell about 20 percent from 2015, according to financial services data firm Dealogic. Because JPMorgan's 11.3 percent share of deal revenue put it atop all Wall Street banks, other firms could see lagging performance.

Wall Street's trading desks will be the other wild card as U.S. banks announce earnings this week and next. Again, JPMorgan's results rebounded from early 2016.

"Core trading results were much better than feared at down 11 percent [compared to] down 20 percent [year over year] in February," Jefferies consumer banks analyst Ken Usdin wrote in a report.

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On JPM's investor call, CEO Jamie Dimon said the bank's fixed income, currency and commodities trading segment is a "healthy business," and he called their results for the quarter "good."

Consumer banks Bank of America and Wells Fargo will report earnings on Thursday, and Citigroup announces results Friday. Investment banks Morgan Stanley and Goldman Sachs will report first quarter earnings on Monday and Tuesday, respectively.

Correction: This version corrected that the more than 3 percent rise in share prices was at Wednesday's opening.

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