JPMorgan is not substantially increasing lending anytime soon

JPMorgan Chase had a blowout quarter for earnings. We’re talking earnings of $3.3 billion for the quarter here.  That’s up over 50% from last year’s already high $2.1 billion. Does that signal an increase in lending? No.

If you read between the lines of a comment Dimon made on the quarterly conference call about paying a dividend again, you understand that JPM wants to husband capital. Here’s what he said to Morgan Stanley’s Betsy Graseck:

So I think we’ve been very clear on the dividend. We want to see real underlying employment growth for at least several months. We would like to see — that’s number one. Number two, we would like to see real and sustained improvements in delinquencies and charge-offs in mortgages, and that’s not just one month. We would like to see it continue for a while. Number three, I think we’ve pointed out as have other banks, there’s a lot of capital uncertainty. Uncertainty around Basel II rules, Basel III rules, dividend tax rules, bonus tax rules and we would like to see some of that clear up before we start using our capital. So that number will probably continue to go up over time. We want to make sure that we are always, always properly capitalized and this Company is never questioned and if you end up with excess you capital you haven’t thrown it away, you just get to use it later.

Translation: we are still pretty concerned about the economy with unemployment so high. You see the distress in delinquencies and charge-offs.  There’s no way we are going to unnecessarily part with capital in this politically-charged environment.

Dimon has always argued that JPMorgan Chase never needed the TARP money foisted on it by Hank Paulson. Now he regrets taking it because he is pissed that JPMorgan Chase is being tarred with the same brush as the likes of Bank of America and Citigroup. Sorry guys, no dividend.

My takeaway from this is that banks are going to be husbanding cash. Under no circumstances do they want to be seen as undercapitalised in any future regulatory regime for bank capital.

I pointed this out last month in discussing the fake stress tests and the coming wave of second mortgage writedowns. At fault are the fake stress tests which gave intellectual cover to the premise that banks were adequately capitalized.

The problem with the stress tests, however, is they gave the banks a way to get from under the yoke of the government’s TARP program. The banks said, “look, we are now well-capitalized even in the worst case scenario of the stress test. We want out of TARP.”

This is bad for three reasons.

• The big banks all paid back $25 billion in TARP funds. Smaller banks like Northern Trust paid back $10 billion or less. That’s hundreds of billions of capital that they all could have as a buffer against losses. Some of them raised additional capital to replenish the coffers. Nevertheless, net-net, we had less banking capital in the system after the repayments than before.
• Banks free of TARP paid out a lot of cash in bonuses that could have gone to shoring up their capital base.  Every dollar paid in cash compensation to staff is a dollar less of capital.  Had these banks been under TARP, they would have been forced to pay lower bonuses – if only for this year.
• The lower capital – and the fact that banks know that having renewed capital problems would mean the end of the line for them – means that banks are less likely to lend freely.  They understand that now is the time to husband capital. Heads would roll if a big bank or super regional which had repaid TARP had another capital shortfall.

Bottom line: don’t expect Jamie Dimon to come knocking at your door offering oodles of cash at low rates any time soon.

Update 1700ET: Also see Joe Weisenthal’s "One Sentence That Explains The Monster Banking Comeback." It also demonstrates that monster numbers are not translating into lending.