Bank earnings season got off to a rocky start Thursday after JPMorgan Chase's second-quarter results fell short of what Wall Street expected. Making matters worse, the lender said it was temporarily halting share repurchases.
The freezing of buybacks comes as the bank responds to a Federal Reserve requirement forcing it to bulk up the capital cushion that would help it ride out a downturn, following the central bank's stress test last month. JPMorgan is also exercising more caution as it prepares for what Chief Executive Jamie Dimon last month warned could be an economic "hurricane."
Dimon tried to clarify his worries over the economy in a call with analysts Thursday morning. While he noted there are severe headwinds—inflation, the Fed's quantitative tightening, and the war in Ukraine—Dimon tried to stress that the bank is equipped to deal with the challenges.
"There's a range of potential outcomes from a soft landing to a hard landing," Dimon said. "It's not going to change how we run the company."
Investors were unconvinced. Shares of JPMorgan (ticker: JPM) fell more than 5% Thursday morning.
JPMorgan's results and Dimon's comments reflect the tightrope bank executives face when discussing a possible recession. While banks have to talk about the risks they face, doing so can raise more concern among investors than is warranted. Downturns are rarely good for banks but they are also a part of the business cycle. While banks like JPMorgan could expect to see slower growth and rising credit losses, regulations from the financial crisis of 2008-2009 make them better able to withstand a crisis.
"We know that if you have a recession, losses will go up. We prepare for all that, and we're prepared to take it because we grow the business over time," Dimon said.
Expectations for the banking sector were already muddled going into earnings, with analysts projecting banks to post an increase in net interest income due to rising rates, while also preparing themselves for a downturn.
That was particularly true in the case of JPMorgan, which saw a 19% year over year increase in net interest income. But Wall Street was more worried about the measures the bank is taking to ready itself for a recession. While JPMorgan easily passed the Fed's annual stress test, it had to increase its stress capital buffer to be able to better operate if the economy turns south.
"In order to quickly meet the higher requirements, we have temporarily suspended share buybacks which will allow us maximum flexibility to best serve our customers, clients and community through a broad range of economic environments," Dimon said in prepared remarks.
That and the earnings miss were more than enough to give Wall Street pause.
Analysts surveyed by FactSet had expected the bank to post second-quarter earnings of $2.89 per share, down nearly 25% from a year ago. Revenue was projected to creep up by 4% to $31.8 billion. Instead, JPMorgan posted earnings of $2.76 from revenue of $30.7 billion. Net income fell by 28% from the year-ago quarter as the bank increased its reserves for potential loan losses by $428 million in anticipate of soured loans. The bank also saw $657 million in net charge-offs.
JPMorgan has been one of the harder-hit bank stocks this year . Shares are down nearly 30%, outpacing the 20% drop in the SPDR S&P Bank exchange-traded fund (KBE). Shares faltered earlier this year when the bank posted higher-than-expected expenses due to salary increases and business investments. And in April, the bank posted a lower profit than expected.
There were a few bright spots in Thursday's report. The bank's return on tangible common equity (ROTCE)—a measure of profitability— hit 17% this quarter, reaching a target the bank had set earlier. The bank also saw trading revenue increase by 15%, with fixed income and equities trading equally benefiting from market volatility.
Morgan Stanley (MS) also reported results Thursday, while Citigroup (C) and Wells Fargo (WFC) will disclose their second-quarter numbers before the bell Friday. Bank of America (BAC) and Goldman Sachs (GS) will report on Monday.