The declines are more in the sentiment than the details of the results. For proof, consider the big difference between the two: JPMorgan temporarily suspended stock buybacks; Morgan Stanley has announced a new $20 billion buyout program. The reason has a lot to do with next year’s capital ratio targets after the Federal Reserve’s recent stress tests. Morgan Stanley was unaffected, but JPMorgan needs to raise additional capital worth more than $13.5 billion on the size of its current balance sheet.
It was the perfect excuse for JPMorgan CEO Jamie Dimon to oppose ‘ridiculous’ and ‘capricious’ regulatory demands, but he still expects to easily achieve goals by reducing some risks and maintaining a more bulk of the bank’s profits for the rest of this year. None of this came as a surprise.
There was bad news for both, primarily in investment banking: fees for arranging the sale of stocks and debt or advising on transactions were down more than 50% from those of the period of the previous year in the two banks. It was worse than expected. The commercial side performed better as volatility in currencies, commodities and equities continued to drive buying and selling activity and demand for derivatives. Revenue growth was strong for both banks.
One of the hardest hit markets this year has been leveraged loans, which are primarily used to fund private equity deals. JPMorgan took $257 million in markdowns on loans it didn’t sell to investors due to the turmoil. Morgan Stanley also took a hit but did not give details. JPMorgan’s loss looks bad for its rivals as it has been increasingly cautious about the business and deliberately reduced its market share over the past year. Bank of America said last month its losses on those loans would be $100 million to $150 million in the second quarter, though that may be optimistic. Other major banks in the sector will also have to absorb painful markdowns.
Dimon, however, put that in perspective against the 2008 financial crisis. Before that disaster, banks were sitting on $480 billion in collectively unsold loans, he said, whereas today the total blocked on bank balance sheets is less than $100 billion. The current batch of unloved loans also represents a much smaller share of the overall market, so over time it should be easier to move it around.
Morgan Stanley also set aside $200 million for an expected penalty related to its employees’ use of unprofessional messaging systems like WhatsApp, the same amount JPMorgan paid in fines late last year. . There’s a grim acceptance in US and European investment banks that everyone is going to get banged up for it – the only question is how much they’ll have to pay.
The thing is, this bad news isn’t yet that bad for either bank overall: JPMorgan’s return on equity was 13% and Morgan Stanley’s was 10%, worse than last year but quite good in the context of what is happening in the financial markets. And the underlying story for personal and business lending still looks good. JPMorgan said consumer spending on cards was up 15% year over year, credit card balances were up and business lending was also strong. Financial buffers for low-income people are getting thinner, but consumers in general still had good cash balances to sustain them as the cost of living rose, he said. Meanwhile, Morgan Stanley CEO James Gorman told investors that a severe recession in the United States was unlikely.
This is obviously an incredibly uncertain time for interest rates, inflation and the global economy. But bank balance sheets are stronger than in previous modern crises, and a lot needs to go wrong in terms of unemployment and output before banks really start to suffer. It looks like storm clouds are ahead, but investors at JPMorgan and Morgan Stanley already appear to be experiencing a worst-case scenario.
More writers at Bloomberg Opinion:
• Consumer Debt Doesn’t Stress Banks—Yet: Paul J. Davies
• Labor market will help, not hinder, Fed’s inflation fight: Conor Sen
• Twitter still wants Musk’s money: Matt Levine
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion
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