INTRODUCTION

As per the Q3 2020 earnings release by JPMorgan, it has exceeded Wall Street's Revenue and Profit forecasts by recording substantial gains in its Corporate and Investment Banking division. Also, the quarter’s main performance was largely driven by the equity capital markets business, which saw an uptick in IPO issuance driven by a strong equity backdrop with stocks trading at or near all-time highs. The Bank has earned USD 9.4 billion of Net Income during the 3^rd quarter. During the period, the Bank has released USD 600 million reserves, primarily on runoff and home lending and changes in wholesale loan exposure. The Bank's traders handily exceeded expectations, and recorded market revenues of USD 6.6 billion boosted especially by strong fixed-income trading.

JPMorgan has also set aside less reserve provisions, compared to the first two quarters of the year. Revenues generated from capital markets and investment banking has also helped offset the decline in its consumer business. The bank, however, has set aside USD 611 million for loans that may go bad, less than the USD 10.5 billion it had put aside against future losses in the previous quarter.

Performance in the Trading division was the bright spot in the quarter even as the pandemic has highly affected in the US economy with thousands of businesses shutting down and the unemployment rate soaring. The economic fallout of the pandemic has triggered one of the worst recessions in decades.

Jennifer Piepszak, Chief Financial Officer (CFO) of JPMorgan in its earning release, said: "We don’t expect any meaningful increases in charge offs until the second half of 2021. However, the medium to longer-term is still highly uncertain in particular as it relates to future stimulus. And so, we remain heavily weighted to our downside scenarios, and with reserves of 33.8 billion, we’re prepared for something worse than the base case. We’re not reserved for the extreme adverse scenario. We are reserved for something worse than the base case because we have put heavy weights on scenarios that are worse than the base case, but we are not reserved for the extreme adverse scenario”.

However, if we delve in, we see a different picture of the JPMorgan's financial status. With the outbreak of the COVID-19+ pandemic, the global economy has experienced the worst financial crisis ever, worse than the 2008 financial crisis, with a rise in unemployment levels. The pandemic has largely affected industries such as aviation, travel & tourism, commercial real estate sectors, automobiles, construction, and retails. The pandemic has jolted down the financial markets with a sharp decline in bond yields, oil and equity prices. Institutions and individuals have experienced liquidity stress, including limited access to credit that has increased the default rates, especially for near-term or in the speculative-grade of corporate debt. Private debt, including corporate and household debt, has reached record levels, and approximately one-half of the investment-grade market held a triple-B rating.

With such humongous losses in the financial markets and defaults in repayment of loans with rising unemployment, it is quite hard to believe the result of the JPMorgan's 3^rd quarter earnings release.

Let us get an insight into the results.

JPMorgan 30+ Days Loan Delinquency Rate 

JPMorgan in its 3Q 2020 results has reported a 30+ day delinquency rates of 1.62%, 1.57% and 0.54% for home lending, card and auto loans, respectively. The delinquency rates of loans have not changed much throughout the last five quarters. The loan delinquency rates for the 3^rd quarter for home lending is higher than the delinquency rates of loans in the 1^st quarter of 2020 and for the card and auto it is very low when compared to the 1^st quarter of 2020.

During the 1^st quarter, the Bank reported 30+ day delinquency rates of 1.48%, 1.96% and 0.89% for home lending, card and auto loans, respectively. This was quite hard to believe.

By digging further, we found that the Bank has created COVID-19 relief programs giving moratorium relief to its consumers. At the end of 3^rd quarter, the principal balance of loans in home lending, card and auto underpayment deferral programs offered in response to the COVID-19 pandemic, still within their deferral period, were USD 10.2 billion, USD 368 million and USD 411 million, respectively. Loans that are performing according to their modified terms are not considered as a delinquent by the Bank.

We have restructured the 30+ day delinquency rate by adding back the humongous amount of loan relief provided by JPMorgan. The 30+ day delinquency rates estimated by Veritaseum have a considerable difference from what is presented in JPMorgan's report. The 30+ day delinquency rate is 6.93%, 3.99% and 1.22% for home lending, credit loans and auto loans compared to 1.62%, 1.57% and 0.54%, respectively as reported in JPMorgan's earnings report.

JPMorgan's 30+ and 90+ day delinquent loan amount for the 3^rd quarter 2020 was reported at USD 13.31 billion, USD 5.6 billion and USD 0.7 billion for home lending, card and auto loans, respectively. However, the reserve for allowance for loan losses is made on the recorded numbers instead of the actual numbers. Allowance for credit losses for hardest hit sectors is very minimal, i.e., home lending (USD 2.7 billion) and auto loans (USD 1.0 billion).

Profit Provisioned for Credit Losses

JPMorgan reserved 5% of its pre-provision profit for provision for credit losses. The Bank has maintained a higher provision for credit losses of 13% out of its profit before provision for Consumer and Community Banking. For Commercial Banking, Corporate and Investment banking, and Asset and Wealth management it doesn’t maintain a provision for credit losses.

Return-on-Equity (ROE)

Return-on-Equity shows the financial performance of a Bank. Assets, Profits, Equity, and fundamental ratios help to analyse how banks are performing, and by looking at the graph it says it all, it shows the performance that how they are performing during the COVID-19+ phase. JPMorgan's ROE has increased drastically and has appeared to be 29% in 3^rd quarter of 2020 whereas it is negative in the 2^nd quarter of 2020. This depicts that the Bank has outperformed in the Q3 2020, which is quite hard to believe looking at such an uncertain environment/market prevailing right now.

Balance Sheet Interest Rate Analysis

The interest rate on JP Morgan's every asset in 3^rd quarter 2020 is trending significantly downwards which means either the Bank is earning less interest or has to engage considerably more risk in an attempt to make the same amount of earning on its deployed assets; which is contradictory to ROE which has increased drastically to 29% in Q3 2020 from -2% in Q2 2020.

Net Income

JP Morgan's Net Income on every segment except for the Corporate & Investment banking (Trading sector) has declined in the 3^rd quarter of 2020 compared to Q2 2020. The trading sector recorded a profit of USD 4.3 billion in the third quarter.

Net Interest Margin

JPMorgan's Net Interest margin and interest rate spread has declined during Q3 2020 and reached 1.82% and 1.75%, respectively, from 2.37% and 2.17% recorded in Q1 2020. It is depicting lower Profit earnings in the 3^rd quarter of 2020 and is expected to reflect even less in the next quarter.

Figure8: Net Interest Margins(in USD millions)

Conclusion

JPMorgan Chase earned USD 9.4 billion of Net Income on nearly USD 30 billion of Revenues, and maintained credit reserves at ~USD 34 billion given significant economic uncertainty and a broad range of potential outcomes. Even the Trading division gains are significantly risky, unsustainable and volatile, while Corporate and Investment bank results came in better than JPMorgan's estimates. During Q3 2020, Net Interest Margins and Interest Rate spreads have declined to 1.82% and 1.75%, respectively, owing to the Fed's decision to no change in interest rates. On the other hand, while the Bank has reported 30+ day loan delinquency rate of 1.62%, 1.57% and 0.54% for home lending, card and auto loans, respectively, the adjusted rates seem to be way higher at 6.93%, 3.99% and 1.22% if we consider the amounts set under-payment deferral programs offered in response to the COVID-19 pandemic. Moreover, the fate of the industry is closely tied to the pandemic because unemployment and business disruptions caused by the virus impacts the abilities of customers and companies to repay debts. Also, JPMorgan shares have dropped 27% this year, which is the biggest gap in performance versus the S&P 500 Index in at least 80 years. However, the point to keep in mind is that JPMorgan, which along with the rest of the industry is banned from repurchasing stock through 2020, could repurchase shares as early as the first quarter of 2021.

We think the stock's performance may hinge on management's view on the pace of the recovery and the path to normalized ROE. These trends may have a larger impact on JPMorgan's stock and financial performance in the coming quarters.