JPMorgan Chase & Co beat Wall Street estimates for profits in the second quarter due to a surge in trading revenue while setting aside a record $10.5 billion to cover future defaults, as the United States slides into one of the worst recessions in decades.
The biggest US lender's loan loss provisions reflect the damage wreaked by the coronavirus pandemic, but its performance in markets bode well for trading powerhouses Goldman Sachs and Morgan Stanley, both of which report later this week.
The bank suspended share buybacks at least to the end of the third quarter but Chief Executive Officer Jamie Dimon said its reserves were substantial and that it could endure more losses and still be able to pay investors a dividend.
"We can easily get through very, very tough times and never cut the dividend," Dimon told a call with analysts.
Shares in JPMorgan rose about 2 percent as both profit and revenue beat consensus estimates, but the reserve build of $8.9 billion painted a grim picture for future quarters.
Dimon warned this was not a normal recession and that the tell-tale signs of a downturn may only be visible early next year.
"The consumer's incomes are up, savings are up and home prices are up. The recessionary part will come later," he said.
The provisions were a record for the bank, and came as Citigroup and Wells Fargo also set aside the biggest amounts since the 2008-2009 financial crisis, in part the result of changes that require banks to take provisions now if a borrower may default at any point during the agreement.
JPMorgan now expects double-digit unemployment in the United States through the first half of 2021, but it warned that it may not have much visibility on the damage it is dealing with.
"Compared to the first quarter, our reserve build now assumes a more protracted downturn ... as we prepare and reserve for something worse than our base case," Chief Financial Officer Jennifer Piepszak told a media call.
The bank's traders, often operating from home, had a huge quarter, with revenue up 77 percent as financial market dealing volumes hit record-breaking levels.
Bond trading alone generated $7.3 billion in revenue as central banks bought billions worth of government paper under the huge stimulus programs to deal with the pandemic.
While executives had indicated that Wall Street trading desks would set records in the quarter, the jump was well beyond expectations.
"At first blush, our take is positive," said UBS AG analyst Saul Martinez. "Capital levels improved...reserve builds appear conservative and full year guidance for net interest income and expenses were generally maintained."
Overall, the bank's net income did fall, to $4.69 billion, or $1.38 per share, beating analysts' lowered estimates of $1.04 per share. Revenue rose 15 percent to $33.8 billion, also beating estimates.
Net interest margin fell to 1.99 percent from 2.37 percent in the first quarter. Trading revenue surged to $11.3 billion.
"It's clear that JPM can be viewed as prepared for all environments and that capital can build quickly given the strength of their franchises," brokerage Everclear said in a note.
"We'd view these results as a good read-through for the other capital markets-centric banks, particularly Goldman."