The Wonky Metric Making JPM Execs Giddy About the Second Half

Jamie Dimon of JPMorgan Chase (JPM) has joined the chorus of megabank chief executives who are oddly upbeat about the second half of 2014, but a normally obscure data point — utilization rates — may put his optimism on firmer footing.

In the years since the financial crisis and during the protracted recovery, bankers have preferred to temper expectations. It's part of the reason investors are embracing second-quarter reports in the early going of earnings season — the results weren't as bad as billed.

Yet the big bank CEOs have offered a rose-tinted outlook in recent days, sometimes in the face of mixed or even countervailing data.

"It is a modest economy which is modestly getting better," Dimon said in preaching positive thinking during a call Tuesday with reporters. "You are all too depressed sometimes."

Similarly, Citigroup Chief Executive Michael Corbat said Monday that he and his colleagues are "feeling better" and foresee "revenue uplift" in the second half — even though Citi's second-quarter revenue fell 6% year over year.

Wells Fargo broke its streak of 17 consecutive quarters of sequential earnings growth and its mortgage banking income plummeted. Yet there are signs — such as gains in jobs and auto sales — that "economic growth is accelerating," CEO John Stumpf said last week.

"[W]e remain optimistic" about the growth opportunities the economic recovery promises for Wells Fargo, Stumpf said, though in almost the same breath he acknowledged that it "remains uneven."

Whether the economy, and banks' revenue prospects with it, is turning the corner remains to be seen. But among the most telling of the green shoots offered by JPMorgan on Tuesday was the increase in the utilization rates of its commercial lines of credit — to 33% at June 30 from 30% at the end of last year.

The banking industry widely sees that kind of increase as a harbinger of loan growth.

Paul Miller, an analyst at FBR Capital Markets, says that JPMorgan's disclosure of the 33% mark stands out from its competitors, and it makes Dimon's hopes for the rest of the year seem less starry-eyed than others'.

"Wells didn't report that, Citi didn't report that," Miller says. "I think now that JPMorgan has, every bank that releases and hosts a call will be asked about utilization as the first question. This is an important change. They are all always optimistic and say things like, ‘I know loan data doesn't show it, but everyone says they are going to borrow money this quarter.' "

(U.S. Bancorp reports its earnings on Wednesday, and loan utilization is a frequent point of discussion for its CEO Richard Davis.)

Miller's insight may explain why Dimon played up the figure so much during his remarks Tuesday.

"Utilization is usually a pretty good measure of companies starting to expand, and early on it's receivables and inventory," Dimon said in a separate call with analysts. "You haven't really seen it in capital expenditures yet, and if you looked at U.S. capital expenditures in total including big businesses, they are kind of flat to down. That will ultimately be the driver of real growth. So if you start to see that, you are going to hopefully see a stronger economy, but utilization is I think is the first sign."

JPMorgan would prefer to see that go ratio higher, Chief Financial Officer Marianne Lake said on the call.

Thirty-three percent is "much, much lower than you would expect them to be over time which would be slightly above 40%," Lake says.

Outsiders agreed that the 33% figure was noteworthy but still low by historical standards.

Mike Mayo, an analyst at CLSA, says JPMorgan's utilization rate was one example in a laundry list of small improvements that are tough for observers to rationalize.

They are achievements, but they can still be viewed as "bounce from the bottom" and could be on shaky ground, he says.

"In a lot of ways, JPMorgan's results are a microcosm of the angst and indecision that many market observers feel about whether or not we will be leaving this Japan-like economic environment," Mayo says. "We all want to know how sustainable the improvement is."

There's no question Dimon, in his first earnings call since announcing this month that he would take treatment for throat cancer, sought to be as reassuring as possible about JPM's prospects and his own health going forward.

But his and Lake's comments were also rooted in the company's balance sheet and bottom line. Its better-than-expected earnings pushed the stock up 3.75% in heavy trading on Tuesday, with shares trading at $58.40 late in the afternoon.

"What we have seen in the second quarter gives us reasons to be optimistic that we are going to continue to see growth at around those levels in the second half of the year," Lake said in responding to a question about loan growth. The company grew total average loans by 2% from the first quarter.

"We have seen generally better sentiment. … The phones are ringing," Lake said. "It is across geographies, so it just feels like the environment is conducive for us to continue to be able to add."