JPMorgan Q2 results: US lender beats estimates on trading boost, but loan losses loom

JPMorgan Chase & Co beat Wall Street estimates for profit in the second quarter due to a surge in trading revenue, while it set aside a record $10.5 billion to brace for rising defaults as the United States slides into one of the worst recessions in decades.

The biggest US lender's loan loss provision reflects the damage wreaked by the coronavirus pandemic, but its performance in markets bodes well for trading powerhouses Goldman Sachs and Morgan Stanley, both of which report later this week.

JPMorgan's trading revenue surged 77% in a quarter that saw record-breaking volumes in financial markets. Bond trading alone generated $7.3 billion in revenue as central banks bought billions more in government paper under the huge stimulus programs to deal with the pandemic.

While executives had indicated that Wall Street trading desks would set records in the quarter, the jump was well beyond expectations.

The bank's shares rose 2.2% as both profit and revenue beat Refinitiv's consensus estimates, but the reserve build of $8.9 billion painted a grim picture for future quarters.

Chief Executive Jamie Dimon warned this was not a normal recession and that the tell-tale signs of a downturn may only be visible early next year.

"The consumer's incomes are up, savings are up and home prices are up. The recessionary part will come later," Dimon said.

The bank is now expecting double-digit unemployment in the United States through the first half of 2021, but warned that it may not have much visibility into the damage it is dealing with.

"Compared to the first quarter, our reserve build now assumes a more protracted downturn ... as we prepare and reserve for something worse than our base case," Chief Financial Officer Jennifer Piepszak said in a media call.

Dimon also said the bank would continue to pay dividend unless "the economic situation deteriorates materially and significantly". However, the lender suspended share buybacks at least through the end of the third quarter.

RECORD LOAN LOSSES
The scale of expected loan losses at JPMorgan, America's largest bank by assets and one of the biggest in the world, is a major barometer of the health of the US economy, as the pandemic drives up unemployment and puts pressure on businesses.

The loan-loss provision was a record for the bank, and came on a day when Citigroup and Wells Fargo also set aside their biggest credit loss provisions since the 2008-09 financial crisis.

A new accounting rule requires banks to take provisions now if a borrower may default at any point during the agreement, even if that is months or years away.

The bank's net income fell to $4.69 billion, or $1.38 per share, in the quarter ended June 30, ahead of analysts' lowered estimates of $1.04 per share. Revenue rose 15% to $33.8 billion, also beating estimates.

Net interest margin fell to 1.99% from 2.37% in the first quarter. Trading revenue surged to $11.3 billion.

Apart from trading, the bank's commercial banking and asset & wealth management units also reported higher numbers compared to the year-ago period.