JPMorgan and Morgan Stanley’s earnings losses cast shadows across Wall Street

JPMorgan and Morgan Stanley's earnings losses cast shadows across Wall Street
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JPMorgan Chase and Morgan Stanley cast a shadow on Wall Street after reporting a sharper-than-expected fall in second-quarter earnings that signaled the end of the industry’s pandemic-era earnings boom.

Wall Street banks have raked in record fees during the coronavirus pandemic by working on a spate of mergers and acquisitions, public listings and special purpose acquisition companies.

But the business pipeline, particularly the flow of IPOs, has slowed significantly since the beginning of the year as investors shy away from spacs and money-losing startups.

It was the first profit loss by either JPMorgan — the largest US lender by assets and an industry leader — or MorganStanley since early 2020.

“From the view [for investment banking]while our existing pipeline remains healthy, backlog conversion could pose a challenge if current headwinds continue,” JP Morgan CFO Jeremy Barnum said in a conversation with analysts.

Banks are also struggling with a challenging regulatory environment. JPMorgan said it had “temporarily suspended stock buybacks” after the Federal Reserve hit it with one last month higher capital requirements.

And Morgan Stanley signaled it expects to pay a $200 million fine to US regulators in connection with a federal investigation into its employees’ use of unauthorized communications channels. JP Morgan paid this amount of fines to solve a similar case.

JPMorgan reported second-quarter total net income of $8.2 billion, or $2.76 per share, down nearly 30 percent from $11.5 billion, or $3.78 per share in the same period of the previous year. Analysts had forecast quarterly net income of $8.5 billion, or $2.90 per share, according to consensus data compiled by Bloomberg.

At Morgan Stanley, net income attributable to shareholders also fell 30 percent to $2.4 billion, below estimates of $2.75 billion.

Both banks suffered from larger-than-analysts-expected falls in investment banking revenues, as well as losses on loans they have not yet been able to sell on to third parties.

The somber reports set a somber tone for US banks’ earnings season, with Citigroup set to report earnings on Friday, followed by Goldman Sachs and Bank of America on Monday.

JPMorgan shares fell about 4.5 percent early in the afternoon in New York, while Morgan Stanley lost 0.6 percent. Goldman was down around 3 percent and BofA was down 2.8 percent.

During the quarter, JPMorgan and Morgan Stanley suffered a setback after being unable to sell debt they underwrote to fund leveraged buyouts to investors.

JPMorgan said it took $257 million in markdowns on loans it held for sale, while Morgan Stanley said it suffered $282 million in mark-to-market losses.

For JPMorgan, the poor investment banking bottom line has meant a surge in the money supply it makes from lending, which has risen sharply as the Fed hikes interest rates.

The bank reported net interest income — the difference between deposit payments and income from loans and other assets — of $15.1 billion. That was a 19 percent increase from a year earlier, the largest such increase in more than a decade.

JPMorgan raised its 2022 target for net interest income excluding its markets business to over $58 billion from more than Before $56 billion.

Wells Fargo analysts said JPMorgan’s earnings loss reflected Wall Street banking, which is being partially mitigated by the strength of Main Street banking.

JPMorgan and Morgan Stanley reported a jump in sales at their trading desks as investors traded heavily amid volatile financial markets.

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