Randomly Noted

J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees number came from equity and debt underwriting, with the big piece coming from debt – a quarterly record of $971 million for the bank.

Grouped under the investment bank is also trading – and fixed income once again ruled the day. Of the $6.6 billion of revenues from “fixed income/equities,” $5.23 billion came from fixed-income. The bank didn’t offer a break down i.e. how much was from FX trading, for example.

Finally, the investment bank (trading and traditional IB) contributed about 43% of the firms net income ($2.37 billion of a total $5.5 billion).

A quarter where the investment bank didn’t carry the whole day, er quarter, but carried a lot of it.

If other banks report the kind of earnings numbers that came out of J.P. Morgan today, suffice it to say the banking industry is certainly on the road to recovery. Strong earnings and revenue numbers were impressive. But the numbers that really stood out to this blogger were some of those that are the bread and butter of an investment bank (and commercial bank that does investment banking).

Investment banking fees were up in the three major categories: equity underwriting fees of $489 million were up 22% from the prior quarter. Debt underwriting fees of $920 million were up 17% from the prior quarter. And advisory fees of $424 million were up 10% from the prior quarter.

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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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The numbers are just starting to flow in – and it is becoming pretty evident that the one-time U.K. bonus tax imposed on banks is reaping more than expected for the British government.

Two big U.S. banks said yesterday and today that they have paid about $950 million in that bonus tax to the U.K. – JP Morgan yesterday said it would fork out $550 million and Citigroup said it would pay $404 million.

Bank of America didn’t detail its payout but said its non-interest expenses increased by $870 million, largely driven by the U.K. payroll tax and prior year incentive deferrals. Some analysts had estimated that Bank of America would pay a tax of more than $400 million.

The tax was imposed on banks after the public outcry over bankers compensation.

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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There was probably a lot of high-fiving and hand clapping when the Tesla Motors IPO was priced and closed the day $6.89 higher – a remarkable feat for an IPO these days and especially given how poorly the stock market in general performed.

So, maybe I am taking the glass half full approach, but, it seems to me the underwriters really mispriced it and left a lot of money on the table. The company itself sold 11.88 million shares. If the deal had been priced closer to where it closed rather than the original $17 price this morning, the company (a novel electric car maker) would have taken in an additional $81 million or so in proceeds. And for the selling shareholders? They would have pocketed nearly $10 million more.

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Wall Street has always been associated with trading. And volatility in trading revenues can have a huge impact on the earnings of a particular firm. As the first quarter earnings reporting season comes to a close for Wall Street’s biggest banks, we thought it would make sense to see if there were any interesting trends that developed. And boy there was: fixed-income trading fueled very strong trading results across the board. As the above chart shows, fixed-income (lumped in with forex) was on a roll for the major Wall Street banks. At Morgan Stanley (MS in the above chart), fixed-income accounted for 65% of the trading revenue. At Citigroup (C), it was 82%. The others: Goldman Sachs (GS) was 75%, Bank of America (BAC) was 77% and J.P. Morgan (JPM) was 78%.

What was interesting was that some of the banks noted that volatility in the fixed-income market had declined and that spreads had narrowed. That usually spells an environment for reduced money-making opportunities. But instead, there was heavy customer order flow. Sustaining those strong trading gains will be the challenge for the banks.

It amazes this blogger how often people buy things they just don’t understand.

The ongoing legal saga perpetuated by the city of Milan, Italy, is yet one more example. Milan engaged in interest-rate swaps with the four above banks in 2005 when it sold a 30-year fixed-rate bond. Milan made a bet interest rates would move lower, so, it engaged in a swap that obligated it instead to pay at floating rate.

There seems to be a lot of allegations about the banks misleading Milan – and other municipalities – and they therefore received big fees illegally. (The banks were formally charged yesterday.)  But this quote from Dario Loiacono, a lawyer in Milan, in today’s FT seems to sum it all up: “It is clear that the municipalities did not understand the risks and costs they were taking on.”

Message to Milan city officials: You wasted taxpayer money by spending it on things you don’t understand. You lost millions of Euros by making a bad bet. You should shoulder more of the blame here than the banks.

If you think J.P. Morgan’s stock price can rise 27% between now and Oct. 28, 2018, Uncle Sam just provided you a cheap way to make money on that bet. As part of the U.S. financial system rescue plan last year, banks that borrowed money from the Treasury also had to issue the government warrants exercisable into their common stock. J.P. Morgan issued 88.4 million warrants to the government.

These warrants were priced last night at $10.75 each and sold by the government to a group of banks that turned around and sold them to investors. The warrants are now trading at $11.28. Each warrant lets you buy a share of J.P. Morgan  for $42.42 (the stock trades now around $40.80). So, for the warrants to be worth exercising, the stock needs to trade around $52.05 for an investor to break even (what you pay for the stock and what you paid for the warrants.) An investor stands to post much bigger returns by buying the warrant because it is much less expensive than the stock.

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The Securities and Exchange Commission’s Office of Stop Insulting Investor Intelligence has a new one to put on its banned phrase list: “IPO pulled because of market conditions.” That’s the language used by Trony Solar Holdings in postponing its IPO today, on the same day another Chinese company came to market albeit in sloppy trading. (China Nuokang Bio-Pharmaceuticals priced at $9 and has dropped to $8.30).

As Newswires reporter Lynn Cowan points out, the solar products business has been under a lot of pressure recently. Demand has dropped while production was ramped up – leading to excess inventory and price cuts. So, investors likely want to see that industry stabilize before throwing money at companies in the sector. It has nothing to do with the financial markets. BTW – two investing arms of large companies would have liked to see the deal get down because they were looking to cash out some of their money. Intel was looking to sell about $20 million of stock and J.P. Morgan – the underwriting – was looking to sell $25 million.

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