After the US CPI print on Wednesday, the market’s attention is now on the first quarter earnings season. The focus is on JP Morgan, as it is the biggest bank in the US. After reporting Q1 results earlier, its stock price is lower by 3% in pre-market trading. The reason for the decline is a small miss in net interest income along with a rise in its expenditure guidance, although Q1 adjusted revenue was $42.55bn, easily beating estimates of $41.6bn.

No bad loan concerns at JP Morgan

JP Morgan is a victim of its own success, and the bar was high for these results. The market is nervous, since the next leg of the global stock market rally is hinging on whether corporations can deliver on profit growth. Today’s results from JPM suggest that nothing less than perfect will do, even though there was some promising news around charge offs and credit loss provisions. JPM, a notoriously conservative bank, set aside fewer reserves for loan losses than the market expected. The provision for credit loss was $1.88bn, vs. estimates of $2.78bn.  Charge offs were also lower than expected, at $1.96bn, vs the $2.2bn expected. This is good news that the market seems to be ignoring. JPM is not holding less money back for bad loans because they are being reckless, it is a sign of US economic strength. They are not seeing a surge in bad loans and so they do not need to keep so much money in reserve.

Return on equity hit 17% for the quarter, and their CET 1 Capital ratio was 15%. Revenues from both equities and fixed income trading beat expectations for the quarter and trading revenue was $7.9bn, beating the $7.71bn expected. Jamie Dimon boosted the dividend by 10% last month and has said that the Q1 performance gives the bank more scope to return more capital to investors. What is not to like!  

The NII bar was too high for JPM

The glitch in these earnings was the net interest income estimate for 2024. The bank still expects to make $90bn in net interest income, this was less than the $90.72bn the market had expected. Why is the market treating these results as a mini disaster, when the difference between net interest income forecasts is within the margin of error? This is where psychology comes in. The market is getting used to seeing blowout earnings and nice upside surprises, after the likes of Nvidia and JPM have posted amazing results in recent quarters. Anything less than a blow out quarter is a disappointment, even though JP Morgan has once again showed its prowess in generating revenue and still has a ‘fortress balance sheet’.

Jamie Dimon explained the lower net interest income (NII) forecast vs. the street’s as a sign of normalization in NII. However, if the Fed keeps interest rates higher for longer, and if this does not break the US economy, then JPM’s NII could easily be revised higher for 2024. However, the market is not focused on this right now.

Citi’s turnaround in Q1

In contrast to JPM’s share price, which is falling ahead of the US stock market open, Citi reported profit that beat estimates and its share price is expected to open up by more than 1.2% later on Friday. Net income was $3.4bn for Q1, EPS was $1.58 per share, easily beating the $1.23 per share expected by analysts.

Citi also benefitted from a surge in corporate bond sales in Q1, and consumers spending more on credit cards. The prospect of the Fed remaining on hold for longer before cutting rates could be positive for Citi if these trends continue. Overall revenue was $21.1bn in Q1, vs. the $20.4bn expected. This is 3% higher than revenues in Q1 2023. In contrast to JPM, net interest income beat estimates at $13.5bn. Wells Fargo also saw net interest income fall relative to a year ago, which leaves Citi as an outlier for strong NII gains in Q1.

Citi takes advantage of higher interest rates

The market is clearly focused on NII rather than other revenue streams from US banks. Citi’s share price is rising even though trading revenue fell by 7%. This was better than the 8-12% decline in trading revenue the bank had forecast earlier this year. Its wealth unit also registered a 4% decline vs. a year ago.

Why the sell off in JPM may not last

This is a turnaround for Citi, which registered one of its worst quarters for earnings in Q4 2023, which sent the stock price tumbling. The market is clearly favoring Citi’s turnaround efforts, its lower valuation and its strong net interest income that beat forecasts. However, it is still hard to see a sustained selloff in JPM shares, as its earnings report was generally strong and its forward price to earnings is only 11.57 for 2024, vs. a P/E ratio of 24 for the S&P 500 as a whole.

What can US banks tell us about the future of earnings season?

The start of earnings season could be a sign of what is to come. The market has been focused on the biggest companies that posted the biggest earnings in recent quarters, if they deliver anything that is less than perfect, their stock is sold off. For Citi, the bar was lower than it was for JPM, so when they did better than estimates the market pounced. Thus, the Q1 earnings season could see the focus shift to smaller underperformers this earnings season, who have the opportunity to play catch up if they are able to beat earnings estimates.

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