What's going on?
J.P. Morgan Chase (JPM), the biggest bank in America, reported much better than expected revenue and profit for the most recent quarter. That’s being taken as good news for the whole banking sector.
What does this mean?
JPM is the first bank to report earnings and so it’s often viewed as a bellwether for how the others will do (although that doesn’t always prove to be the case). It benefitted significantly from cutting its expenses, especially its legal costs. That shows how the risk of getting fined or sued has dissipated (such costs have been a HUGE drag on banks’ profits in recent years). It also benefitted from a better-than-expected performance in its trading division (i.e. buying/selling bonds, etc.) – and that could suggest that other banks with big trading divisions, like Goldman Sachs and Morgan Stanley, will also report good numbers (they announce their results next week).
Why should I care?
For markets: Banks are likely to benefit if overall economic conditions keep improving.
Reasons include: more companies and people want to borrow money, interest rates are more likely to up (which means banks are able to charge more for their loans) and loans are more likely get paid back. It appears that the US economy is recovering from a weak first quarter – and, if that continues, banks should be set to benefit.
The bigger picture: JPM said it’s being “very, very careful” with auto loans – and that could be bad for carmakers.
Until very recently, auto companies in the US were selling record amounts of cars, SUVs and trucks. However, much of it was driven by the extremely low interest rates at which people could borrow money to buy the vehicles – and lots of loans were made to people with low credit scores. There’s now an increased risk that auto loans won’t get paid back. And as banks like JPM pare their exposure to the space, it’s likely becoming harder for people to borrow money to buy cars – and that would hurt companies that sell cars (like Ford and General Motors).