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JPMorgan, Morgan Stanley earnings disappoint, fueling selloff

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JPMorgan suspended share buybacks and set aside more cash to cover potential credit losses. Morgan Stanley reported a higher capital ratio, driving optimism for more repurchases.

JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) delivered disappointing earnings that reminded investors of mounting credit and market risks. The results fueled a stock market selloff.

JPMorgan shares tumbled early after the company said it was suspending buybacks. That removes the cushion that could shield investors from a stock price slump. It's sacrificing repurchases to boost capital and set aside more cash to cover credit losses as the US economic outlook deteriorates.

The stock fell to as low as US$106.06 before recouping some of the losses to end the day 3.5% lower at US$108. That dragged the financial sector down 1.9% while S&P 500 index slipped 0.3%.

Morgan Stanley shares declined after investment banking revenue shrank by more than half in the second quarter. That was fueled by declining equity and fixed income underwriting, while deal-making fell, highlighting a capital market slowdown.

The bank also reported a common equity tier 1 capital ratio of 15.2%. Tier 1 measures the bank's core equity capital against its total risk-weighted assets as a sign of financial strength. That ratio far exceeds the requirement, "leaving ample flexibility for buybacks," Credit Suisse analysts including Susan Roth Katzke said in a note.

Geopolitical tension, high inflation, waning consumer confidence and the uncertainty about how high US interest rates could go "are likely to have consequences on the global economy," JPMorgan Chief Executive Officer Jamie Dimon said in the company's earnings release. "We are prepared for whatever happens and will continue to serve clients even in the toughest of times."

JPMorgan's second quarter financial results

JPMorgan's earnings per share fell 27% to US$2.76, missing analysts' estimates. The results were impacted by a net US$428 million added to the company's credit reserve. That's a reversal from the US$3 billion released from reserves a year earlier, as the economy rebounded from a pandemic-driven recession.

Investment banking revenue slumped 61% on lower fees, while assets under management declined 8% to US$2.7 trillion. On the consumer banking side, revenue from home lending fell 14% as rising interest rates hurt the housing market.

The bank said it's halting the repurchases to meet requirements set for global systemically important banks. In the second quarter, it reported a net buyback of US$224 million shares.

JPMorgan share decline deepened its losses this year to 32%.

Morgan Stanley's second quarter financial results

Morgan Stanley reported second quarter earnings of US$1.39, missing analysts' estimates as investment banking activity weakened. Its institutional securities segment posted higher revenue. That was driven by strong performance in fixed income and equity as clients tweaked their investments amid elevated market volatility.

Morgan Stanley also took a US$200 million hit related to a regulatory matter involving unapproved personal devices and the firm's record-keeping requirements.

Regulators have been looking into the use of private emails and WhatsApp for work-related communications. In December, Bloomberg reported JPMorgan is working with regulators on a US$200 million settlement to resolve US investigations into lapses in monitoring employee communications.

Do the financial results change analysts' views on JPMorgan and Morgan Stanley?

So far, not so much. RBC Capital's Gerard Cassidy and Barclays Plc's Jason Goldberg still had a "buy" recommendation on JPMorgan when they updated their ratings on July 14, according to Etrade.

Before the earnings, 13 of the 28 analysts who cover JPMorgan have a "buy" or "strong buy" recommendation on the stock. Thirteen are recommending investors hold on to their stake, according to data on the Yahoo Finance website. While some have already pared their price targets on the stock ahead of the results, they still see upside potential. On average, they expect shares to rise to US$148.19 in a year, implying a 38% gain.

Across the sector, Credit Suisse analysts have the highest conviction on JPMorgan, Morgan Stanley, and three other major banks. They see each of these stocks having more than 30% total return potential, according to a Credit Suisse note on July 1.

"For the banks, we see more resilient earning power through the cycle after a decade of de-risking and, to be sure, fundamental strength/earning power in particular, in place at present," the analysts said.

On Morgan Stanley, 16 of 29 analysts have a "buy" recommendation, according to data on the Wall Street Journal website. Five have an "overweight" rating, which means investors should allot a heavier weighting to it. On average, they expect shares to rebound to US$96.19 in a year, implying a 30% upside potential.

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At the time of publication, markets editor Luzi Ann Javier owns JPMorgan shares.

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