JPMorgan balance sheet shows recovery not complete

By Dan Wilchins – Analysis

NEW YORK (BestGrowthStock) – JPMorgan Chase & Co (JPM.N: ) is increasingly sanguine about the economy, but the company’s balance sheet reflects a bank that is still facing difficulty.

Stripping out the effect of an accounting change, the bank’s loan book fell by about 1 percent during the quarter, while low risk assets like overnight loans of reserve balances at the Federal Reserves rose nearly 18 percent. Cash on its balance sheet rose more than 19 percent.

These are not the actions of a bank that is seeing a huge surge in loan demand, analysts said. But meanwhile, Chief Executive Jamie Dimon sounded bullish notes on the economy on a conference call with reporters, noting “The chance of a double dip is rapidly going away” and “This could be the makings of a good recovery.”

“Banks like JPMorgan are saying all the right things about things looking better, but their actions indicate there is still a lot of risk embedded in the economy,” said Bill Fitzpatrick, an equity research analyst for financial stocks at Optique Capital Management in Milwaukee.

To be sure, it may be that JPMorgan is refraining from investing in loans now in anticipation of a near-term surge in loan demand.

That may be a reasonable expectation. Dimon said small-business loan demand was up “pretty substantially” in the first quarter. Loan delinquency rates are improving, and the bank is expecting fewer losses in credit cards than it had previously.

Dimon has largely resisted the relentless optimism of many of his counterparts, offering refreshingly honest views of the financial crisis during the depths of the downturn.

But some investors are still skeptical of Dimon’s economic comments on Wednesday, and note that overall loan demand is hardly strong.

Chief Financial Officer Michael Cavanagh said on a conference call with investors that demand from mid-sized companies, which is the real litmus test of commercial and industrial lending, was still down a bit from the fourth quarter. Balances for other types of loans fell from the fourth quarter, too.

Noted one hedge fund manager, “The balance sheet does not show evidence of real recovery.”

JPMorgan’s loan book, excluding off-balance sheet assets that were moved onto the bank’s books due to an accounting change, was about $626.2 billion in the first quarter That compared with $633.5 billion in the fourth quarter.

JPMorgan is not alone in dealing with tepid loan demand. Federal Reserve data show that commercial and industrial loan assets, a key source of bank profits, have been falling since at least September, on a seasonally adjusted basis. Overall loan levels are essentially stagnant.

Investors are spending a good deal of time now trying to determine how much money banks will make when the economy is growing at a normal rate, a measure known as “normalized earnings.”

Banks whose stocks traded at just a few times normalized earnings early last year are now trading at more than 10 times expected results. Recovery hopes have lifted bank stocks dramatically in recent weeks — the KBW Banks index (.BKX: ) is up 34 percent this year.

But for many banks, it’s hard to imagine their achieving normalized earnings until loan demand improves.

Analysts debate whether the economy will recover first, driving loan demand, or whether loan demand will recover first, enabling economic recovery.

But either way, JPMorgan’s results demonstrate that normalized earnings are not here yet, and forecasting when they will arrive is difficult.

Stock Market Money

(Reporting by Dan Wilchins; Editing by Steve Orlofsky)

JPMorgan balance sheet shows recovery not complete