JPMorgan Chase (JPM) held its 2016 Investor Day on Tuesday and released some notable commentary on its energy portfolio, the capital markets business, and its outlook for the U.S. economy. The stock ended the day down 4.2%, underperforming the KBW Bank Index (BKX), which declined by 2.9%. JPM is down ~16% from its December high, compared to the BKX, which declined ~21%. There were a few significant takeaways from the presentation.
Large Increase in Energy Provisions/Reserve Expectations
The bank announced that it is increasing its energy provisions by a material amount in the 1st quarter of 2016, which is most relevant to the U.S. regional and mid-cap banks with higher energy exposure, especially those in the Southern states. JPM executives also stated that they will add $500 mln to the reserve by the end of March, for a period end total of $1.3 bln, or ~9% of funded exposure[1]. This is a notable increase from the $815 mln reserve level the bank announced less than two months ago, for year-end 2015, which suggests that credit deterioration driven by the decline in oil is happening faster than executives expected. Bank executives also stated that they are not seeing meaningful issues with loans outside of the energy sector (real estate, commercial and industrial) in energy-exposed areas, i.e., no contagion at this time.
The bank announced that it is stress-testing its energy portfolio at US$25 per barrel for the next 18 months, for which it would need to increase reserves by $1.5 bln, or ~20% of energy exposure. Should this scenario come to fruition and other banks need to follow suit, some analysts believe that on average, 2016 EPS estimates for energy exposed banks would decline by 40% on average[2]. This shows that the impact on provisions in relation to the decline in energy prices is not linear, and in fact, there are thresholds for the price of oil which could result in significantly higher credit losses.
Capital Markets Downturn
Daniel Pinto, head of investment banking, stated that Q1 has been “very tough… clearly dark”, which isn’t surprising given the decrease in announced M&A deals and broad declines in global equity markets. Global investment banking fees for the bank have fallen by 25% year-over-year, with notable declines in debt capital markets and equity capital markets businesses. Importantly for other large investment banks, JP Morgan noted that trading revenues have declined by 20% year-over-year.
Ex-Energy, Positive Outlook for U.S. Economy
Outside of energy, the bank expects that charge-offs will be minimal in 2016. In regards to negative outlooks and turmoil in financial markets, CEO Jamie Dimon reiterated his confidence in the U.S. economy, citing the strength of consumers’ balance sheets, debt service ratios, and their contribution to GDP (~70%) as supporting factors. He noted that financial markets sometimes “act rationally and sometimes they don’t…the noise will sort out and we will be okay.”
Notes
[1] Total exposure is ~$44 bln. Total drawn exposure is $13.8 bln.
[2] Source: Bank of America Merrill Lynch.