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JPMorgan Q3 Earnings Easily Top on Solid Trading & Lending


Driven by improved trading and mortgage banking revenues, JPMorgan Chase & Co.’s JPM third-quarter 2016 earnings of $1.58 per share handily surpassed the Zacks Consensus Estimate of $1.40. However, the figure reflects a 6% decline from the year-ago period. Notably, the results included a legal benefit of $71 million.

Improved fixed income and equity trading revenues, higher mortgage banking fees and growth in investment banking income drove the results. Further, higher net interest income, perhaps attributable to the rise in loan supported top line.

Additionally, a decent decrease in operating expenses, a legal benefit and net reserve releases in the Oil & Gas portfolio aided the bottom-line growth. However, higher-than-expected rise in provisions (largely driven by growth in the Card portfolio) hurt results marginally in the quarter.

Notably, shares of JPMorgan gained nearly 1.5% in the pre-market trading. Perhaps, the earnings beat led to positive investor sentiments. However, the actual picture will emerge after the full day’s trading session, once investors and analysts go through the core results.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was impressive. All segments, except Corporate and Consumer & Community Banking, reported a rise in net income on a year-over-year basis.

Net income for Consumer & Community Banking fell 16% year over year. Asset Management earned 17% higher than the prior-year quarter. Additionally, net income for Corporate & Investment Bank and Commercial Banking surged 99% and 50%, respectively, while the Corporate segment incurred net loss.

Among other positives, credit card sales volume improved 10% and merchant processing volume grew 13%. Commercial Banking average loan balances increased 14% and Asset Management average loan balances rose 5%.

Higher Trading & Mortgage Banking Revenues, Lower Costs

Managed net revenue of $25.5 billion in the quarter was up 8% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $24 billion. A 48% jump in fixed income markets revenue and 21% growth in mortgage banking income were the primary reasons for top-line improvement.

Non-interest expense was $14.5 billion, 6% lower than the year-ago quarter. The decline was primarily due to lower legal expenses and consistent cost-reduction initiatives, partially offset by a rise in compensation costs.

Credit Quality: A Cause of Concern

JPMorgan’s credit quality deteriorated during the quarter. As of Sep 30, 2016, non-performing assets were $7.8 billion, up 7% from the year-ago period.

Net charge-offs were up 16% year over year to $1.1 billion. Further, provision for credit losses surged 86% year over year to $1.3 billion, primarily due to increases in consumer reserves.

Strong Capital Position

Tier 1 capital ratio (estimated) was 13.6% as of Sep 30, 2016 compared with 12.3% as of Sep 30, 2015. Tier 1 common equity capital ratio (estimated) was 12.0% as of Sep 30, 2016, up from 11.5% as of Sep 30, 2015. Total capital ratio came in at 15.1% (estimated) as of Sep 30, 2016 compared with 14.9% as of Sep 30, 2015.

Book value per share was $63.79 as of Sep 30, 2016 compared with $59.67 as of Sep 30, 2015. Tangible book value per common share came in at $51.23 as of Sep 30, 2016 compared with $47.36 as of Sep 30, 2015.

Bottom Line

Bond and equity trading revenues rebounded during the quarter, given the Brexit-driven volatility and continued investments by JPMorgan to technologically upgrade its systems. Hence, while other banks are moving away from fixed income business, JPMorgan gained further market share.

Moreover, rise in loans and deposits reflect an improving economy. Also, the energy sector headwind seems to be easing as oil prices have rebounded.

JPMORGAN CHASE Price, Consensus and EPS Surprise

JPMORGAN CHASE Price, Consensus and EPS Surprise | JPMORGAN CHASE Quote

Currently, JPMorgan carries a Zacks Rank #2 (Buy).

Among the other major regional banks, Bank of America Corp. BAC is scheduled to report on Oct 17, while U.S. Bancorp USB and BB&T Corporation BBT will release their results on Oct 19.

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