JPMorgan Non-GAAP Revenues Beat, GAAP Miss; Earnings Boosted By $1.3 Billion Loan Reserve Release
Non-GAAP EPS, sure. But non-GAAP revenues? Up until today one would think that kind of accounting gimmickry is solely reserved for the profitless one-hit wonders of the world, i.e. Tesla, but moments ago we just saw JPM report two sets of revenues: one which was the firm's GAAP revenue, and which was $23.156 billion, and another, far higher number, which was $24.112 billion which JPM described as revenue on a "managed basis" or also known as non-GAAP, and largely made up as they go along.
Here is how JPM explains what it is:
In addition to analyzing the Firm’s consolidated results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total consolidated net revenue for the Firm (and total net revenue for each of the business segments) on a fully taxable-equivalent (“FTE”) basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on consolidated net income/(loss) as reported by the Firm or net income/(loss) as reported by the lines of business.
And some more:
The Firm implemented a Funding Valuation Adjustments (“FVA”) framework this quarter for its OTC derivatives and structured notes, reflecting an industry migration towards incorporating the cost or benefit of unsecured funding into valuations
For the first time this quarter, we were able to clearly observe the existence of funding costs in market clearing levels
As a result, the Firm recorded a $1.5B loss this quarter
Or, in short, trust us - the number is whatever we want it to be (although the fact that JPM now has funding costs in market clearing is disturbing). And it is thus, that JPM just beat revenue expectations of $24.08 billion on a non-GAAP basis, but missed on GAAP. Frankly, does anyone even care what JPM's number are - just fast forward to the next litigation settlement.
Here is how JPM reports its GAAP vs non-GAAP revenue:
So continuing with the other fudges, JPM also reported Net Income of $5.3 billion, or EPS of $1.30, once again on a pseudo-GAAP basis. However, this wouldn't be JPM if it didn't have a boat load of adjustments, and sure enough it did as per the waterfall schedule below. As can be seen, the biggest benefit aside from the $0.32 DVA & FVA (yes, blowing out your CDS is profitable once more), was the $0.27 in litigation charges. Of course, for these to be an addback, they have to be non-recurring instead of repeated, guaranteed every quarter, but once again, who cares.
And since we choose to stick with GAAP, the bottom line is that JPM revenues dropped from $23.7 billion in Q4 2012 to $23.2 billion this quarter, while EPS dropped from $1.39 to $1.31.
Oh, and yes: for the purists, here is the bottom line: of that $5.3 billion in "earnings", $1.3 billion or double the expected (at least from Barclays) $616MM, came from loan loss reserve releases. Accounting magic wins again.
Looking at the firm's key business line (ex prop trading), we see more of the same, as Mortgage production-related revenue cratered by $1.1 billion Y/Y (and $90MM Q/Q) to just $494 million, while production expense ballooned to $989 million. However, when netting out a plunge in servicing costs as well, Mortgage Banking net income rose modestly to $562MM, a $144MM increase Y/Y, if a $143MM drop Q/Q
In the investment bank, things were not much better, as Equity Market revenue continued to drop, while Fixed Income Markets posted a tiny increase Y/Y, even if the bleeding Q/Q continued.
Of note: average VaR continued to drop, and is now down from $106 in Q4 2012 to just $42 in Q4 2013 (down from $45 a quarter earlier).
Finally, for everyone hoping that JPM's Net Interest Margin will finally rise due to the steepening in the yield curve we have partially good news: on a "managed" basis, as defined by JPM, Core/JPM NIM did indeed rise for the first time in years. The partially bad news however, is that the Market-based NIM once again dropped, declining from 0.89% to a fresh record low of 0.86%. Oh well - more non-GAAP measures coming up soon.
Full earnings presentation below.