Randomly Noted

J.P. Morgan reported strong earnings this quarter yet again. But there were interesting trends worth keeping an eye on for the quarters ahead. For starters, in its presentation to investors after it released earnings, the bank addressed its home lending portfolio. “It is not clear when we will see delinquencies improve.” That’s perhaps a little bit of a surprising statement because the trend line in general has been a stabalizing one in terms of delinquencies.

Looking ahead, J.P. Morgan said its loss for the next quarter in home equity loans could be close to $1 billion (in the third-quarter just reported, it had a charge off of $730 million). In prime mortgages, it said the next quarter may show losses of $400 million (3Q charge offs were $265 million). And it said it could see losses of $400 million in subprime (it had a charge off of $206 million in the 3Q).

In general, the credit picture has gotten better. But the point J.P. Morgan is making here is that problem loans haven’t gone away. One bright sign is the trend in credit card delinquencies, which appear to be improving.

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J.P. Morgan reported stronger than expected earnings today ($4.8 billion) in part because its bad loan portfolio wasn’t performing quite as badly as before. The chart to the left demonstrates how deliquency trends for J.P. in the subprime mortgage area have begun to not only level off but decline. The numbers remain high, but are at least headed in a better direction. It saw similar improvements in its home equity line portfolio of loans as well. Surprisingly, where there wasn’t a lot of improvement was in the prime mortgage portfolio (see chart below). Some other interesting trends in the earnings report worth noting: the bank continues hiring and is increasing staff. At the end of this quarter, it had 232,939 employees, up a little more than 6,000 from the 1st quarter of the year. At the end of last year’s second quarter, the bank had 220,255 employees on the payroll. Equity underwriting fees were down 68% and debt underwriting fees were down 6%.

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Vacant NYC Commercial Space - Photo By Heesun Wee

The conventional wisdom has been that the problems in the commercial real estate market might peak at the end of this year or certainly by early 2011. Now, one of the major ratings agencies is out with a report that suggests the peak in problems won’t happen until 2012. That not-so-rosy scenario was part of a monthly delinquency report from Fitch, which says are up five times from a year ago. The big loser? Hotels. About 9.13% of those loans are delinquent ($4.6 billion versus $363.7 million a year ago.  - a 1,175% increase.  It’s no wonder companies like Hyatt are on the prowl for acquisitions. See WSJ interview with Hyatt CEO.

Stock performance of Discover (DFS), Capital One (COF) and the DJIA since market lows in March

If you believe consumer confidence is returning and that it will translate into consumer spending, one investment play is with credit-card companies. That way, you aren’t making a bet on a particular industry where consumers may spend money. Instead, you are playing the economics of increased credit card usage. The chart above certainly shows that’s what some investors have been thinking. Those are eye-popping gains for two credit-card companies from the market lows in March. And they have significantly outperformed the Dow.

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Both Moody’s and Fitch are out with monthly reports on commercial mortgages and while their numbers are slightly different, both are showing a disturbing trend continuing: higher rates of delinquency  in commercial mortgage backed securities. The table above shows a breakdown of the four major sectors and spells out the rate of increase in just the past month.

As a point of reference – overall CMBS delinquencies were at 0.22% in January 2007. That rose earlier this year to 0.95%, according to Moody’s. As of last month, that percentage of delinquent loans was 4.47%. There can’t be an economic recovery until this trend reverses.

We keep banging the drum about deteriorating commercial real estate being the spoiler for any economic recovery. But we also shouldn’t forget about credit card debt and rising delinquencies in that area. Earlier today, Moody’s said U.S. credit card delinquencies rose for a third consecutive month.

As Dow Jones Newswires reported earlier: “The delinquencies, which give a glimpse of credit-card issuers’ potential losses and how much they may need to set aside in reserves, rose to 6.12% in October from 5.97% in September and 5.79% in August, driven by increases in 60-day and 90-day delinquencies.

“So-called early stage delinquencies were little changed from September but up 11% from a year ago, Moody’s said. The credit rating company expects early stage delinquencies to creep up over the next several months.”

Going back a few years ago, when consumers were up to their eyeballs in mortgage debt, they made sure they could stay current or close to it on their credit cards because this little piece of plastic is what they were living off of – they chose to let mortgages default when the refinance game didn’t work anymore. The question is: how many of these people who are defaulting now on their credit cards already defaulted on their mortgages? A double whammy for the financial sector if that number is significant.