I believe that I know how to read Corporate Financial Statements, S & P Reports, etc. However, after 39 years working in the Financial Services sector, always with a Bank Subsidiary, I can only throw my hands up when it comes to understanding Bank Financials. They seem to have more Rabbit Holes than Alice and the Mad Hatter had ever thought of in Adventureland.
Today, JPMorgan Chase announced it’s Quarterly Earnings and reported a gain of some $455 Million, thanks to the shift of $2.1 Billion from the Bank’s Loss Reserve. The stock soared on the news. This is the Rabbit Hole where a Bank can shift profits, generally in a good quarter into the Reserve and then, if Trading or Loan Losses are not as bad as expected in the future, they can be added back to (then) current Profits.
The Bank does not pay taxes on the Profits that are parked in the Reserve; however, if they later bring them back into Earnings, generally in a weak quarter, they will then recognize the “Profits” as Taxable Income.
This process is recognized as being in Accordance with Generally Accepted Accounting Principals (GAAP). No doubt, as other Banks report earnings, you will see this procedure…again and again. Sleight of hand?
Today, the Financial Services Sector led the Dow Jones rally of 202 points; but, on what, Creative Accounting? Banks still have a lot of warts: the question of Sufficient Equity Capital; the on-going EuroZone Debt Crisis that impact banks on both sides of the Atlantic; the Manipulation of LIBOR, perhaps going back as far as 2005; Questionable Trading and Underwriting Practices; improper Mortgage Lending Schemes, etc. To me, this sector is as Toxic as many of the questionable Credit-Default Swaps that many dealt in in the recent past. If you still wish to invest in Financials, only do so on a limited basis. At least, that’s my suggestion. Buyer Beware!