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$JPM & $WFC Q3: TWO DIFFERENT STORIES

10/15/2022

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So much data in these earnings calls and earnings presentations.

Overall observations:
- JPM went through their results quickly, and painted a happy, confident story of a bank with many sources of profit that is doing well. There is nothing to worry about, everything is fine. We have headwinds, but they are under control. In a Q&A, Jamie Dimon answered that our reserves are the same in Q3 as Q2 because we already knew about the headwinds and took action. Mr. Dimon had such confidence when he said that the bank is selling weak assets and buying strong ones (example being Ginnie Mae mortgage securities where the mortgages were sold for 2% or 2.5% and buying ones where the mortgages were sold at 5% or 5.5%. They are 'making money' by being flexible, although they wrote off about $1B from sales of US Treasuries and Mortgage Backed Securities in the quarter. They say that for every 1% rise in interest rates, they lose $4B in capital (in AOCI).

JPM is a diversified bank, with strong commercial banking, asset and wealth management, and investment banking. JPM bought Bear Stearns, and has a settlement and prime brokerage business. They have Northeast and Midwest depositors in strength. 

- WFC is discussing their business in more detail. Every business has headwinds. The recession is already coming to the WFC customer. Deposits are down, loan balances are down, late and delinquencies are up slightly, and things are soft. Consumers are spending more, and saving less. This is a tale of a bank cost cutting their way to keep up with softening business. By one example, loan originations in mortgages are down ~25% to the lowest level since 2007, as mortgage rates are up 300bps, or 3%. They are reducing their mortgage capacity to match reduced demand.

So, maybe the typical JPM customer is better equipped to survive this economic climate? Maybe the mix of investment and commercial businesses are just better, stronger and more sophisticated than WFC? Possibly true, as WFC is truly a bank (a collection of large regional banks stitched together) and not an investment bank. This bank is telling a tale of woe for the American consumer, that they are spending faster than they are earning. As a reminder, Wells Fargo has a large base of depositors in California.

One note: AOCI will take years to earn back once interest rates stop rising. They will take a while. They traded out some MBS for GNMA to get better treatment (a little bit of repositioning). Not at big sizes now or in the future.

Commercial real estate: Business is growing for Wells Fargo. Loan balances are up. Growth in multi-family and some industrial properties. New multi-family housing starts are up and growing. The performance of the portfolio is solid, but uncertain. Those property types most impacted by the Pandemic are back to normal. Future OPEX is uncertain.

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    Jeffrey Cohen

    Investment advisor representative & father of six.

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