“Hopefully… It’s not the beginning of something really bad.”
JP Morgan Chase is a money-making machine. Profits in the fourth quarter rose 10% to $5.4 billion, bringing the total for 2015 to a record $24.4 billion. But it was a mixed bag of the good, the bad, and the rotting – of the type we haven’t seen in six years.
So revenues fell 2% for the year (under GAAP), which is to be expected, given that revenues of S&P 500 companies have fallen for four quarters in a row, according to FactSet. It’s been the worst revenue recession since 2009. It’s tough out there.
Total assets at the bank fell 3% to $2.35 trillion during the quarter, which CFO Marianne Lake explained this way during the earnings call this morning (transcript via Seeking Alpha): “The balance sheet was down in part purposefully and a little bit because of market conditions at the year end.”
But JP Morgan did what American companies do so well: it cut costs to more than make up for the revenue declines.
This cost cutting included over 5,000 layoffs across its four major business units – corporate and investment banking, consumer and community banking, asset management and commercial banking – with the first 1,000 folks already gone by May 2015 when the layoffs were first reported. At the time, the bank announced it would also overhaul its 5,000-plus branches, with technology replacing some humans.
In 2014, it had already axed 7,900 people in its mortgage division. It has been axing people quarter after quarter, for years. Since its peak in Q1 2012, headcount has dropped over 10% to 234,598.
And so, annual expenses fell 4%. Lake ascribed it to “lower headcount” and “branch efficiency.” And there was also a “modest benefit from the strengthening dollar.”
Then there was the rotting element. JP Morgan added $136 million to its loan-loss reserves to cover expected future losses on its loans. Of that, $124 million was associated with its oil & gas loans. It was the first time since Q4 2009 that any of the big four banks – JP Morgen, Citigroup, Bank of America, and Wells Fargo – have added to their loan-loss reserves.
And it’s only the first step. Lake admitted that the bank “would expect to see some additional reserve build in 2016,” but the price of oil would have to remain at about $30 a barrel for about 18 months for it “to be significant.” And that would mean “reserve builds of up to $750 million,” so not anything dramatic for a bank the size of JP Morgan.
“We’re not worried about the big oil companies,” CEO Jamie Dimon threw in. “These are mostly the smaller ones….”
Thus, JP Morgan did the very things that are associated with a recession: a 3% decline in assets, a 2% decline in annual revenues, a 4% decline in annual expenses, including cost cutting, layoffs, and “branch efficiency,” and the first increase in loan-loss reserves in six years.
If enough companies go through this procedures of declining revenues, cost cutting, and layoffs, it can trigger a recession.
Business “is as good as it’s ever been,” Dimon said about his part of the world, despite these conditions. “Obviously it’s going to get a little bit worse,” he added. “We’re not forecasting a recession. We think the US economy looks pretty good at this point.”
Yup, despite declining revenues, asset shedding, cost cutting, and layoffs. And “a little bit worse” would entail even steeper revenue declines and more cost cutting and layoffs? He didn’t say. But the economy can only grow when companies do the exact opposite: sell more, spend more, and hire more!
Pushed on the disconnect between the current “market turmoil” and his view that the economy was hunky-dory, he ran through some of the characteristics of the US economy, including its slo-mo “2% to 2.5% growth for better part of five years”:
People are getting adjusted to China slowing down. When you have commodity prices go down like that there are big winners and losers. The oil companies are the losers. Consumers are the beneficiaries. Brazil gets hurt. India benefits. South Korea benefits. Japan benefits.
And he added: “Hopefully this will all settle down. It’s not the beginning of something really bad.”
Now at the end of the credit cycle, defaults are rising and credit is tightening. Read… OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time