Analyst Note| Eric Compton, CFA |
Wide-moat JPMorgan reported excellent fourth-quarter earnings, blowing out Factset consensus of $2.62 with reported EPS of $3.79. This equates to a return on tangible common equity of 24%. The biggest swing factor, one we have highlighted in the past, was provisioning for credit losses. In the current quarter, JPMorgan was able to release almost $3 billion in reserves compared with net charge-offs of only $1.1 billion, resulting in a positive effect on the income statement of $1.9 billion. Compared with credit costs of roughly $600 million last quarter, this was a roughly $2.5 billion swing in earnings, or roughly $0.59 in EPS, assuming a 24% tax rate. While positive provisioning developments aren’t sustainable indefinitely, it is worth pointing out that for full-year results, in what was arguably the toughest year for banks since the financial crisis, JPMorgan reported a return on tangible common equity of 14%! The possibility of reserve releases occurring had been talked about prior to the beginning of the fourth quarter, but it is nice to see it actually occurring as it signals that the banks appear to be very well reserved, which has been our thesis all along. JPMorgan isn’t the only bank seeing this trend, as PNC and Citigroup also reported positive reserve development on Jan. 15.