JPMorgan Chase & Co. (JPM)’s Earnings Tell the Story They Want You to Hear

In its last quarter, when JP Morgan’s nonperforming assets increased by $1.1 billion, it baffled analysts, including myself, by taking a reduction in loan loss reserves of $900 million. In this quarter, however, the value of nonperforming assets has seen a sequential decline of around $800 million, and it reduced its reserves by another $700 million, which boosted EPS by $0.11. However, since Q2, the bank’s nonperforming assets have seen a net increase of $300 million, and during this period, loan loss reserves have been reduced by $2.1 billion to $21.9 billion. This is a clear trend that implies the bank continues to operate with an air of recklessness in order to manipulate perception, i.e. its earnings report.

As investments the U.S. banks in 2012 were one of the biggest stories of the year. Since the beginning of 2012, JPM has slightly outperformed the Financial Select Sector SPDR (NYSEMKT: XLF),  and they have paled in comparison to the rise in Bank of America.  So much of this rise has come because of the resolution of litigation, the successful papering over of the Greek default and continued support by the Federal Reserve at the expense of the rest of the U.S. economy.  If you feel you must have exposure to the banks at this point, I would do so through the ETF, which insulates you from the risks of any one institution.

With credit growth re-entering the U.S. economy versus the shadow banking system, the banks will likely post good numbers at times, but the fundamental weakness of the sector remains unsolved.  So, while there are likely good trades to be made on the banks, long and short, at times this year fundamental investors have to remain cautious until the system can stand on its own without a major dose of central bank support.

JPMorgan Chase & Co. (NYSE:JPM) Bank of America
Stock 6M 34.23% 61.07%
P/E 8.95 45.68
EPS 5.20 0.25
Yield 2.60% 0.40%
Beta 1.66 1.78
ROA 0.92% 0.19%
ROE 10.98% 1.79%

The article JP Morgan’s Earnings Tell the Story They Want You to Hear originally appeared on and is written by Peter Pham.

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