One on One with Moshe Orenbuch, Bank Analyst at Credit Suisse
Thursday, July 16, 2009
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SUSIE GHARIB: JPMorgan reported today second quarter profits rose 36 percent, much stronger than analysts expected. The nation's second largest bank earned $0.28 a share. That's way ahead of estimates of $0.04. Big gains in investment banking offset losses in the bank's consumer lending and credit card operations. Revenues surged 41 percent to $27 billion. The strong results came even though the bank repaid the U.S. government $25 billion it received in TARP money. Joining us now to analyze the numbers, Moshe Orenbuch, bank analyst at Credit Suisse. Moshe, welcome to NIGHTLY BUSINESS REPORT.
MOSHE ORENBUCH, MANAGING DIRECTOR, CREDIT SUISSE: Thanks Susie.
GHARIB: When you look at JPMorgan's results and what the bank said today about the outlook, what's your take on this?
ORENBUCH: Basically the investment bank earned about a dime more than we were looking for and that's very strong, an 18 percent return on equity. And credit quality continued to worsen particularly on the commercial side. But they had to add less in reserves because they started the quarter with a very strong loan loss reserve.
GHARIB: So the CEO Jamie Dimon said today that he doesn't expect the credit card business to make money this year or in 2010. And also there's a lot of these nonperforming loans that they have on the books. So when you add it all up, what kind of shape is JPMorgan in?
ORENBUCH: JPMorgan has an extremely strong balance sheet, both in terms of capital and reserves and it is profitable, so it's actually adding to both of those items. So it quite strong despite the losses that you're referring to.
GHARIB: Now Goldman Sachs reports some strong earnings on Tuesday, today we have these numbers from JPMorgan. When you add up what we've heard so far, how would you characterize the financial health of the banking system, from these two outfits?
ORENBUCH: Well, there's certainly the revenue side of the equation which remained quite strong in the second quarter. It got a little bit weaker in the third quarter as things slowed down seasonally. But the fixed income markets and the equity markets have been relatively healthy.
GHARIB: We have some bank reports coming up. We have Bank of America tomorrow, also Citi tomorrow and next Wednesday Wells Fargo. What should we expect those firms to report?
ORENBUCH: Well, tomorrow's reports, Bank of America and Citi also both have strong capital markets and trading component and so, we're likely to see those to be relatively strong on those lines. In Bank of America's case they have added about $13 billion to their loan loss reserve in each of the last two quarters, third quarter and second quarter. So their operating results will be a little weaker. They have had somewhat higher credit costs than their peers. Wells should have a strong quarter on the mortgage front next Wednesday as you said.
GHARIB: How about Citi?
ORENBUCH: Citi, we're looking for their quarter to be on an operating basis, a little above break even, which is better than they had last quarter. And they've got a bunch of gains in there, so their reported number could be actually quite large.
GHARIB: I understand that you're recommending the stock of JPMorgan, but none of the other banks. Tell us your analysis on that.
ORENBUCH: Basically what we like about JPMorgan is it's diversified. Each of the businesses appears to be well managed again, despite the losses you refer to in the credit card business. And I think it's one of the banks that will be, is best positioned given its capital base, the fact that it's repaid the TARP money to take advantage of this current environment and actually make another assisted acquisition sometime either later this year or more likely during 2010, given the fact that its Washington Mutual acquisition is fairly close to being fully integrated.
GHARIB: Moshe, can you give us your disclosure on JPMorgan? Do you own the stock or does the firm have any relationship?
ORENBUCH: I do not and they do not.
GHARIB: Let me ask you something about CIT. You've heard our report. We were looking at the impact on small businesses if CIT can't come up with the financing. But what would be the impact on the financial system? Everybody always talks about systemic risk. What's the risk here?
ORENBUCH: I think the decision on purely on that basis I think was correct. CIT does not present a systemic risk to the financial system. You're going to have some hurting -- certainly some hurting retailers and one should really question whether this was the time in the economic cycle to make this stand, if you will, on the too big to fail and systemic risk doctrines, because you will have economic impacts that will be negative.
GHARIB: Thank you for coming on the program and sharing all of your thoughts. We appreciate it.
ORENBUCH: Thank you Susie.
GHARIB: My guest tonight, Moshe Orenbuch, bank analyst at Credit Suisse.
