JPMorgan Says Real Estate Could Wipe Out $3 Billion

If you came to the JPMorgan conference call this morning with a negative outlook on bank stocksyou could find data that agreed with your sentiments. My colleague John Carney pointed out this morning that the details contained in the earnings report may be bad news for other banks.

Jamie Dimon
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Jamie Dimon

The earnings report detailed the following: Total net income rose to $4.42 billion from $3.59 billion during the same period the previous year. Those numbers represent $1.01 per share and 82 cents per share respectively.

Net income from investment banking declined 33% in the third quarter from the prior year. That's down to $1.29 billion in the third quarter of 2010 from $1.92 billion in third quarter 2009. The current $1.29 billion net income number includes $142 million being returned to earnings from $379 million set aside for reserves last year.

On page one of their slideshow, JPMorgan points out: "Investment Bank reported solid earnings; #1 year-to-date rankings for Global Investment Banking Fees and Global Debt, Equity and Equity-related" That's good news for JPMorgan, of course. But if the number one bank at generating investment banking fees just experienced a significant decline in net income from investment banking, what does that portend for the rest of Wall Street? (Bank of America and Goldman Sachs report earnings next Tuesday.)

On the home lending front, I was struck by this disclosure: "If delinquencies and severities remain flat — additional impairment over the next two years could be $3B+/-"

Let's try to put the magnitude of that potential impairment into some perspective.

On page one of the slideshow, JPMorgan states that "Commercial Banking reported record quarterly revenue" — so let's use those numbers as a basis for some very rough comparisons.

In third quarter for 2010, JPMorgan reported $471 million in net income on $1.527 billion in revenue from commercial banking. So $3 billion in loan impairment would be equal to roughly six months of commercial banking revenue — based on a record quarter. (By way of comparison, second quarter 2010 generated only $41 million in revenue.)

Now let's compare the potential loan impairment numbers to net income from commercial banking. Net income from commercial banking during third quarter 2010 was $471 million. So the back of the envelope math would indicate that a $3 billion write down on real estate loans would wipe out net income from commercial banking for over a year and a half.

(And third quarter 2010 was a great quarter when compared to second quarter 2010, where commercial banking lost nearly a quarter of billion dollars.)

These may be rough apples to oranges comparisons — but it does make clear the magnitude of the issues involved, and gives you a sense of perspective on what JPMorgan may be forced to write down if loan delinquencies continue on their current trajectory. Or worsen.

Also worth noting: The $3 billion projection of future impairment uses a model where delinquencies "remain flat" — which hardly sounds like a worst case scenario.

Which bring us to the final question on the conference call, directed to Jamie Dimon. An analyst asked Dimon when the banking sector would get out of the doghouse, with regard to public perceptions and the views of the current administration. Dimon sad that he didn't expect that there would be a turnaround in those sentiments until there was a turnaround in the economy.

He ended the call with this: "That's our lot in life and we're going to have to deal with it."

Postscript: I happened to notice that the hold music prior to the conference call was the Adagio from Mozart's Linz Symphony. Mozart is alleged to have written that entire symphony in just four days. Jamie Dimon will probably need to wait longer than that.

Companies mentioned in this post

JP Morgan

Goldman Sachs

Bank of America

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