While the economy is still trying to recover from the effects of the pandemic, America’s largest bank by assets has reported a record profit of $12.14 billion or $3.79 per share for the fourth quarter on Friday – exceeding analysts’ forecasts. That accounts for a massive increase of 42% as compared to the previous year when the profit was $8.52 billion or $2.57 per share.
Releasing Cash Reserves
The bank’s earnings per share would be $3.07 if one-time items are excluded which surpasses Wall Street’s estimates of $2.62 earnings per share. The one-time item was the bank releasing some cash it had saved up last year to counter potential loan defaults fueled by the pandemic and the recession that followed. JPMorgan warned investors that demand for loans was likely to stay low this year.
Banks had kept billions of dollars aside to deal with potential bad loans that were likely to result from the coronavirus outbreak. JPMorgan was specifically more assertive in building up cash when the pandemic began.
How Releasing Reserves Affects Profits
When these funds are released, they are added directly to the bottom line while reporting results. However, this money is not income generated from loans, customers, or borrowers. It is essentially funding that was put into escrow and is no longer there.
JPMorgan CEO Jamie Dimon said that positive vaccine and stimulus developments were the drivers to the reserve releases this quarter, pointing out that the bank has over $30 billion reserves.
It is worth highlighting that the $2.9 billion release was only a portion of the amount that JPMorgan had saved last year. Since it seems like the pandemic is here to stay for a long time, particularly in the US, it remains uncertain how much more the bank might release in the future.
Short and long-term interest rates have also been dragged down by the pandemic, hurting the main source of income for banks. JPMorgan’s net interest income fell 7% to $13.4 billion. On the bright side, Wall Street has seen record IPOs and mergers & acquisitions as businesses rush to raise funds to fight the pandemic. Such transactions are completed through the investment banking division of banks for which the banks charge an advisory fee. The same fee has been the revenue driver for JPMorgan this quarter.
Investment Banking & Trading Lead Revenue
The corporate and investment bank reported a profit of $5.35 billion, almost double as compared to $2.94 billion for the same periods last year. Higher advisory fees rocketed investment banking revenue by 37% to $2.5 billion. Trading revenue soared 20% to $5.9 billion as investors reconsidered their portfolios at year-end. Overall revenue increased 3% to $30.2 billion.
Consumer & Community Banking Falls Behind
The bank’s consumer & community banking unit has suffered during the quarter with revenue falling 8% owing to a drop in the core consumer banking and credit card lending divisions. The only silver lining in the consumer business were mortgages. The housing market has been surging owing to low-interest rates and increasing prices as more population moves to the suburbs. JPMorgan reported a 16% surge in home lending income as compared to last year.
Shares of JPMorgan have increased by 11% in 2021 before the earnings results. However, they fell slightly Friday but are still trading at a record high.
For the future, the bank said that it estimates non-interest expenses to increase to $68 billion in 2021 from $65.5 billion. The bank is planning to invest another $1.5 billion in its business and another $900 million in technology. The spending plan is in line with the bank’s efforts to expand and grab more market share.