JPMor­gan sig­nals rough 1Q as trad­ing flags

The Pak Banker - - COMPANIES/BOSS -

JPMor­gan Chase & Co sig­nalled a rough first quar­ter on Tues­day with dou­ble-digit de­clines in in­vest­ment bank­ing rev­enues and a $500 mil­lion in­crease in pro­vi­sions for ex­pected losses on en­ergy loans. Plum­met­ing oil prices, volatile mar­kets, stub­bornly low in­ter­est rates, pres­sure from reg­u­la­tors and a slow­down in China have com­bined to hurt banks world­wide over the past few months.

Against such a back­drop, com­pa­nies are ei­ther shy­ing away from or un­able to is­sue debt and equity and in­vestors are re­luc­tant to take on more risk, said Daniel Pinto, JPMor­gan's head of in­vest­ment bank­ing. "There is no doubt that so far it has been a very tough quar­ter," Pinto said dur­ing a pre­sen­ta­tion at the bank's in­vestor day in New York.

JPMor­gan's in­vest­ment bank­ing fee rev­enues were down 25 per­cent so far this quar­ter com­pared with a year ago and its trad­ing rev­enues were 20 per­cent lower, al­though Pinto said some of the de­cline in trad­ing was due to a strong year-ago per­for­mance when JPMor­gan prof­ited from Switzer­land's de­ci­sion to re­move its cur­rency cap.

The big­gest U.S. bank by as­sets also gave it­self an­other year to meet one of its most im­por­tant profit goals, as hopes for higher in­ter­est rates fade, ham­per­ing the bank's abil­ity to make prof­its on its loans.

JPMor­gan's shares closed down 4.18 per­cent, help­ing to drag down the S&P fi­nan­cials in­dex .SPSY 1.8 per­cent. Thou­sands of jobs have been cut in the U.S. en­ergy in­dus­try alone and roughly a third of oil pro­duc­ers, or 175 com­pa­nies, are at high risk of slip­ping into bank­ruptcy this year, ac­cord­ing to a study by Deloitte, in­creas­ing the risk that bank loans will not be re­paid.

JPMor­gan's move to raise its en­ergy loan loss re­serves by over 60 per­cent comes a month af­ter the bank said oil com­pa­nies were "sur­pris­ingly re­silient," but a drop in the price of oil CLc1 LCOc1 below $30 a bar­rel in Jan­uary has made the sit­u­a­tion worse. Around half of the in­crease in re­serves for oil and gas loans was con­cen­trated on a cou­ple of cor­po­rate clients, the bank said.

"There will be a mean­ing­ful num­ber of th­ese play­ers who have no op­tions. I think we have only be­gun to see the range of bank­rupt­cies in oil and gas," said Doug Petno, the head of JP Mor­gan's com­mer­cial bank. Un­der a "rel­a­tively se­vere" sce­nario, with oil prices at $25 a bar­rel for 18 months, the bank said it would have to set aside an ad­di­tional $1.5 bil­lion in re­serves.

JPMor­gan's oil and gas loan port­fo­lio amounted to $42 bil­lion, or less than 2 per­cent of to­tal as­sets, as of the end of Septem­ber, ac­cord­ing to the bank's lat­est avail­able data.

The global rout in com­modi­ties is beat­ing up banks world­wide. Stan­dard Char­tered Plc (STAN.L), which is heav­ily ex­posed to en­ergy and min­ing, re­ported its first an­nual loss since 1989 on Tues­day af­ter bad loans soared.

JPMor­gan's U.S. ri­vals stock­piled their de­fenses against en­ergy losses last month with Wells Fargo & Co (WFC.N) rais­ing pro­vi­sions against soured as­sets by more than 70 per­cent, nearly half of them for oil and gas loans. JPMor­gan also ex­pects to in­crease re­serves for me­tals and min­ing loan ex­po­sure by $100 mil­lion to $350 mil­lion. The bank said it had not seen any sig­nif­i­cant con­ta­gion from the trou­bles in the en­ergy sec­tor into its other lend­ing busi­nesses such as com­mer­cial real es­tate and busi­ness bank­ing.

Lake said JPMor­gan was now tar­get­ing 2018 rather than 2017 to meet its prof­itabil­ity tar­get of a 15-per­cent re­turn on tan­gi­ble com­mon equity as hopes fade that the U.S. Fed­eral Re­serve will fol­low up its quar­ter-per­cent­age-point De­cem­ber rate hike with more in­creases this year.

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