Another week, another warning from megabanker JPMorgan (JPM).
Two months ago, as you probably recall, JP spooked stock market investors with news that it had managed to rack up $2 billion worth of losses, trading derivatives on European debt.
Market capitalization was lost. CEOs were subpoenaed. Mea culpas were released … and life went on.
Then last week we learned that the news from May was much worse than initially feared. On Friday, JPMorgan announced grim second-quarter earnings:
- Profits came in at $1.21 per share — better than expected, but worse than the $1.27 than JP earned last year.
- Revenues were also down — a whopping 17% year over year.
- And as far as the trading fiasco goes, instead of losing $2 billion, JP confessed it had actually suffered something closer to a $6 billion loss ($5.8 billion, to be exact).
So how did investors take the news? With a sigh of relief and a wipe of the brow.
Turns out, investors never really thought JP’s losses would stop at $2 billion, and had been bracing themselves for a much bigger hit when earnings came out. When the news turned out less dire than feared, they rushed to bid up JP shares by 6%.
But really, they needn’t have worried in the first place.
Why not? It’s simple math: Over the past 12 months, JPMorgan Chase earned $16.5 billion. Analysts predict it will earn more than $17 billion by the time this year is over, and then earn $21.5 billion more next year! With profits this robust, the occasional $5.8 billion trading loss is … well, more than a flesh wound, but certainly survivable. And if the analysts are right, next year’s profit will cover this year’s trading loss nearly four times over, making the London Whale’s losses fade quickly into history.
Also published on Medium.
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