With Capitol Hill and Wall Street watching closely, JP Morgan, the largest banking group in the US in terms of assets, will release its earnings report for quarter 2 Friday along with Wells Fargo.
Performance figures released in quarterly reports like this one disclose basic information like earnings – the total profits for the quarter after taxes – and these reports are always anticipated by investors to inform trading decisions. This specific report, however, holds special significance with those pressing for increased federal banking regulation. In May, JP Morgan’s London division was caught in a storm of controversy over a huge multi-billion dollar loss over poorly managed hedge investments involving credit default swaps; a loss so huge, some are predicting the bank will see over $9 billion in losses over the next 2-3 quarters and close to $4.3 billion this quarter.
JP Morgan’s reputation as a controlled-risk investor, a status that was strengthened by the company’s successful navigation around the financial detriment that its competitors weathered harshly during the 2008 meltdown, has been tarnished, and in the months since the huge loss, bank management has made it their priority to regain the banking group’s high standing as a durable investment. The CIO along with investors involved in the loss, like the dangerously bold “London Whale”, Bruno Iskil, have all been replaced, and CEO Jamie Dimon has stated in congressional testimony that the losses have put even his own pay “100% on the table”.
Analyst predictions have been highly varied, with some recommending the large bank as a good investment ahead of the Q2 results and others going as far as to predict a surprise drop in stock value of 5.1%. The evidence for both sides stacks high.
JP Morgan has put a suspension on an order of over $15.5 billion in stock repurchases, leaving many investors to wonder why they should invest in a company that seems hesitant to do the same. JP Morgan had also OK’ed the sale of $25 billion worth of profitable securities over the past two months in an effort to cushion the impact of the trading loss. While the increase in revenue will undoubtedly help bolster the company’s value in the short term, some analysts are criticizing the move as irrational, noting that the assets were high-yield and sold before their prime, not to mention a strong source of revenue that is increasingly rare to come by in an increasingly volatile global capital market.
The worsening situation in Europe and the cooling off of developing markets, however, has led consumers to once again slow their spending and choose to save their money, a trend that benefits JP Morgan’s traditional banking services. Additionally, many predict the clarity provided by the report to lead to a surge in stock value, calming fears of unanticipated shortfalls.
At its foundation though, the bigger problem CEO Jamie Dimon faces is the effect the performance figures will have on the U.S.’ federal regulatory infrastructure. The Volcker Rule, a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that prohibits proprietary trading by commercial bank, is scheduled to be implemented a week after the report on the 21st. The JP Morgan losses served as a reminder to the remaining volatility of the U.S. banking system and many predict more severe enforcement of the Volcker provision, and others yet to be implemented, as a result.
After 2008, JP Morgan’s persistent success led many to label Dimon as a true visionary, “The King of Wall Street”. After this quarterly report, Congress will have to decide whether there really is any sort of manager or management style that can properly oversee a bank that size.