⏰ Banks go back to the start of the pandemic

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Today's big stories

JPMorgan reported quarterly results that don’t bode well for the rest of the banking sector
Japanese stocks have held their own against US stocks this year, so we’ve looked at how to profit if this outperformance continues
TSMC bucked the economic slowdown to post an impressive update

Déjà Vu

What’s Going On Here?

US banking powerhouse JPMorgan posted disappointing quarterly results on Thursday.

What Does This Mean?

During the height of the pandemic, JPMorgan was forced to build up a pile of funds – known as “loan loss reserves” – that would protect its bottom line if customers couldn’t pay off their debts. But after finally releasing those reserves into the business last year, the bank’s found itself right back where it started: it’s been forced to build them up again in case of a recession, adding another $428 million to the total last quarter. And with interest rate hikes dragging on both markets and corporate dealmaking, its faltering investment banking business added insult to injury.

Of course, those hikes aren’t all bad: JPMorgan made 19% more net interest income last quarter than it did the same time last year, while market volatility boosted its trading business. But the bank’s overall profit still fell 28%, and it also suspended share buybacks to save some cash for incoming regulations. That was the final nail in the coffin: investors sent its stock down 5% (tweet this).

Why Should I Care?

Zooming in: Nice try, JP Morgan.
Even JPMorgan’s interest income could take a hit from here on out. See, big banks typically raise lending rates much quicker than they raise savings rates, meaning they can profit from a bigger margin for longer. But cash-strapped customers aren’t suckers, and they’re increasingly moving their money to smaller lenders that pay savers more. So if JPMorgan wants to hold onto them, it might need to start offering a better deal – and fast.

The bigger picture: Brace for impact.
Morgan Stanley let investors down on Thursday too, with its profit plunging by 29%. Like JPMorgan, its investment banking revenue collapsed, but its flagship wealth management business – which looks after rich people’s cash in exchange for a fee – struggled too. So with retail banking, investment banking, and wealth management all looking delicate, this doesn’t bode well for the rest of the sector this earnings season.

You might also like: The hows and whys of investing in financial services stocks.

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Analyst Take

Should You Revisit Japanese Stocks?

By Jonathan Hobbs, Analyst

Like most major stock indexes, Japan’s Nikkei 225 has had a tough run of it this year, falling around 9% since December.

But the S&P 500 has dropped more than twice that over the same period, and there are a host of reasons this outperformance could be set to continue.

For one thing, Japanese companies have consistently been delivering more and more value to their shareholders than American companies have in the last decade.

And for another, Japan is one of the few major economies whose inflation rate isn’t going through the roof: it’s sitting at just 2.5% right now.

So that’s today’s Insight: all the reasons the Land of the Rising Sun looks so bright right now, and how to profit from its stocks.

Read or listen to the Insight here

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