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JPMorgan: The Good, The Bad and The Ugly


There is not really much "ugly" to report, but consumer credit is definitely a concern.


A couple of interesting points came out during the JP Morgan (JPM) conference call, most of which seemed to cheer the analysts who cover the stock.

The Good:

The company did beat, but it was not a quality beat. The details are below.

  • Its investment bank was in-line.
  • Card services, asset and wealth management and treasury all showed strong results, driven by decent top line growth.
  • There are increased consumer reserves-now 40 bps higher than losses.
    • This means JPM is well positioned to withstand a pretty significant downturn in consumer credit.

  • The company made some pretty cheerful comments regarding credit.
    • It expects a normalization of the mortgage market in '08.

The Bad:

  • To make and beat numbers JPM harvested some private equity gains (at least 10 cents) to offset rising provisions
    • Excluding the gains from private equity, the results were largely in line.

  • The increases to consumer reserves were for a pretty big reason-results showed pretty significant deterioration in credit performance:
    • Total Non-performing loans increased by 8 bps (15%); and non-card consumer charge-offs increased 13 bps (8%).

  • When pushed about buying back its own stock, it said that it was not a priority there.
    • Keeping reserves levels high and capital high to fund client revolvers were greater priorities.

The Ugly:

  • There is not really much "ugly" to report, but consumer credit is definitely a concern. However, I think this is largely priced into stock.

  • There were some issues around marks-to-model and what discount rate JPM is using.
    • By switching loss discount rate to a more rational number it is possible that it is understating losses in CDO portfolio and if those marks don't come back, write-downs/write-offs should be expected.
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Position in JPM

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