JPMorgan Chase (JPM  ) shares closed about 3% lower following the company's Q1 earnings report which showed a beat on the top line and a miss on the bottom line. The bank was the first to kick off Q1 earnings season, and there was considerable interest in its performance given the significant challenges and its status as the largest bank by assets.

Despite the stock price reaction and earnings miss, things are much better under the surface as the company issued strong full-year guidance. Additionally, most of its earnings miss can be attributed to an increase in its reserves for loan losses in the event that the economy does go into a recession. It's amusing that this caused the stock price to decline as much of the market weakness and JPMorgan's more than 20% dip over the last couple of months is for this precise reason.

Inside the Numbers

In Q1, the bank reported $2.63 per share in earnings which fell short of expectations of $2.72 per share. It was also a share drop-off from $3.33 per share in earnings last quarter. Revenue beat expectations at $31.6 billion vs. $31.4 billion. Overall, EPS was lower by 42% and revenue was down by about 4%.

One factor in the weakness was a 31% drop in investment banking revenue. It's understandable that uncertainty over geopolitical events, inflation, the Fed, and higher rates have thrown a chill on the buyout and M&A market.

It also added $902 million in reserves for defaults due to a deterioration in economic conditions. This would have boosted EPS by around 23% and led to an earnings beat. In 2020, the bank had also taken loan losses in anticipation of defaults. However, these never materialized due to stimulus payments and a better than expected economy, leading to a nice EPS tailwind for the bank as these were taken off.

One potential silver lining is that loan growth was up 5% which is a sign of strong economic activity. JPMorgan has benefitted from higher rates due to it making lending more profitable. In Q1, net interest income was $14 billion, a 7% increase from last year's Q1. However, a recession would undermine this as loan demand would vanish.

The company is estimating that the war in Ukraine will likely lead to a cumulative loss of $1 billion over time. It doesn't have much direct exposure to Russia but significant secondary exposure through Eastern Europe and sanctions that could affect many of its clients.