JPMorgan CEO Jamie Dimon offered 'a lot of caution' in earnings call, analyst says

S&P Global Market Intelligence's Nathan Stovall joins the Live show to discuss JPMorgan Chase earnings and how Fed rate hikes will affect banks' bottom lines.

Video Transcript

EMILY MCCORMICK: Our next guest has more to say on JPMorgan's latest quarter, and a preview of the bank reports still left to come this week. Nathan Stovall is S&P Global Market Intelligence principal analyst and joins us here for more. Nathan, what do you think about JPMorgan's results this morning? And was this a positive signal for some of the big banks left to report?

NATHAN STOVALL: Well, thanks for having me. And I think Brian said it really well, that Jamie talked about a lot of caution in what could come down the pike. There is quite a bit of uncertainty out there. And we had expected that the numbers are going to be challenging based on difficult year-over-year comparisons because reserve releases fueled earnings last year when we saw them almost double for the industry. And we didn't think that would happen again, but we didn't expect substantial increases in reserves.

And JPM came down here and said you know, we're not real sure what the outlook is like, so we're going to provide a little bit of a cushion. But importantly, Jamie was clear that it was just sort of a higher probability of downside, not that they're actually seeing any real deterioration in credit. So I think that's what people are going to really look for, is are we actually seeing any real weakness, or is it really just sort of uncertainty out there?

The other thing, though, is what does loan growth look like? What the lifeblood of most banks, they make their money by taking in and lending it out at a higher rate. And the loan numbers look pretty good even in the face of weaker mortgage banking. So that's what we're going to turn our focus going forward, can we see continued loan growth? Can we actually put a lot of this excess cash that's sitting on bank balance sheets to work?

BRIAN SOZZI: Nathan, really over the past two years of the-- two-plus years of the pandemic, I think investors have gotten used to investment banking business being quite strong for the banks. Well, in this quarter JPMorgan's investment banking fees down 31%, is this the low point for the year, or are things about to get worse?

NATHAN STOVALL: That's really a tough call, but I mean, I think I would look at the volatility that Jamie talked about that we think that we can expect some volatility here for a while. And we knew it was going to be tough after such a strong year last year, particularly in the first quarter when we saw so many IPOs hit the market. If markets can sort of ease, if we can get some sort of cooling, some confidence, maybe some stability with the war in Ukraine, if the Fed can help sort of manage a soft landing and give some more confidence of what the future holds, I think you could see a rebound from what we saw. But you're going to need a little bit more sanguine markets to really get a rebound from the first quarter.

EMILY MCCORMICK: Typically investors think about the fact that interest rates are moving higher, the Fed is hiking rates. That's all a positive here for bank profitability. Should investors be leaning on that kind of adage to lift these stocks higher in the near term?

NATHAN STOVALL: Sure. Higher rates are definitely good for banks, no doubt about it. And one of the big reasons for that is because I mentioned there's so much excess cash out there. We don't think that they're going to feel much pressure to raise deposit costs at least at the pace they had seen in prior cycles. So as higher rates come down the pike, that's going to flow through their loan portfolios, and help lead to higher margins.

We definitely saw a big lift in the group late last year and early this year on the promise of higher rates, but they've given away a lot of that higher rate trade because people are getting a little bit more nervous about what higher rates and higher inflation could mean sort of for the broader economy and potentially credit. So I think it just is really what's your view of credit, do you think it's-- can the Fed manage a soft landing here? If so then higher rates are going to be a good thing. And we're going to see earnings go materially higher. Particularly for those banks that have really, really, really strong deposit bases, and really strong core customer bases. You could see their margins rise at a really substantial pace.

BRIAN SOZZI: Jamie Dimon has really been coming under fire, rare fire I would say for how much the bank is investing in its business, just billions of dollars, notably in tech. Is there anything that you saw in this quarter that would suggest some of those investments are starting to pay off and that their May investor day might be better received?

NATHAN STOVALL: Well, I think Jamie always talks about things against the short term. Let's look out five years, and he always talks about it in the context of look, we're going to play to win. And so I think he gets really frustrated with the Street when they say you didn't meet the number because expenses were X amount relative to what we expected. And I think his point is that they've got a strong balance sheet, they've got many levers to pull to invest in the future business and they plan to do so and they're not going to worry about the short term.

In fact, we even heard that sort of even outside of just willingness to invest when they were pushed on, do you want to put more cash to work in the short term? We've seen longer-term rates rise pretty materially even before the Fed has moved. And Jamie has said you know, we think we're going to see a lot more rate hikes come down the pike, we're not going to take that rate risk today because we're managing to the longer term, we're not managing to the next quarter or even the quarter after that. And I think that's the way he looks to sort of future investments. And in his mind, really the measure will be whether or not they paid off is not next quarter or even the third quarter, it will be much further down the road.

EMILY MCCORMICK: You touched on this a bit in one of your earlier answers but just looking at this earnings statement, CEO Jamie Dimon said he was still optimistic about the US economy, at least in the short term. And yet the bank has built up its net credit reserves by more than $900 million to protect against downside risks. How should investors ultimately be weighing these mixed signals on the relative risks to the outlook?

NATHAN STOVALL: That's a great question. It really does seem to sort of fly in the face of each other, right? You feel really good about things, you see a lot of tailwind at the back from the economy today but yet we're talking about things that are making us nervous, wider credit spreads, and things like that. Part of that is driven by the reserve methodology that the banks have had to adopt right at the beginning of 2020, the CECL reserve methodology, which requires them to take a much more forward-looking approach. And Jamie really tried to discount focusing so much on that.

And I think that if you're a bank investor, you shouldn't worry so, so much about that, is it going to impact earnings but to the extent that problems come in the future, they will be reserved for it. And I would spend more time sort of looking at the core business, you know, what is happening in terms of borrowing activity from their core client base, what is happening-- we talked earlier about investment banking activity, and sort of driving that top line, opposed to sort of reserving activity. I'm not saying discount it completely because we expected going into this that we thought earnings were going to decline year over year, again because of the lack of reserve releases but if we see a bunch of banks come out here--