by AmazedVein64
JP Morgan’s earnings beat this quarter tells only the rosy part of an otherwise devolving picture. JP Morgan reported a new net debt position on their balance sheet of $42 billion dollars, and they have taken out new debt that they owe other banks and investors over the long term up to levels not seen since 2009. This new debt is very costly, and will leave them chasing higher and higher returns to continue revenue and net income growth. How does a company like JP Morgan, a company that creates no widgets and already services most of the nation in one way or another, to chase higher returns? They will take on more risk (as they have already in the most recent quarter). I am not particularly concerned about deposit flight at JP Morgan – I think that has mostly happened already to the extent that it is going to happen. I am concerned that JPM can report financials that look the way they do in today’s rate climate – and receive a standing ovation though. See the graphic below:
**Edit to add: I see they used at least 2.27B of this long-term debt to buy back their own shares – which did help their earnings beat (if only just barely)*\*
**Edit to add: Some of the leverage activity actually relates to older/less costly debt being called/maturing in conjunction with the bank’s need to adjust for more stringent capital requirements in the wake of SVB which JPM characterized as “making bank stocks un-investable” which you can read more about here – www.ft.com/content/5612cba3-1580-4003-a0ac-6623cbe28ee6*\*
The question remains – why does a bank reporting revenues at 12B per quarter need to borrow at such high cost?
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