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Can JPMorgan’s (JPM) Q4 Earnings Brave Trading Slump?


The expected fall in JPMorgan’s JPM trading revenues will likely have an adverse impact on fourth-quarter 2017 earnings given the significant dependence of its top line on this source. Nevertheless, this may not lead the company to report bleak results on Jan 12. Benefits of higher rates, decent loan growth and relatively better performance of the other segments — mainly investment banking — are expected to offset the trading slump.

Also, though market volatility has not improved much in the last quarter, the decrease in trading revenues will primarily be attributable to comparison with the prior-year quarter that witnessed significantly higher volatility following the U.S. Presidential election results.

In 2017, several political and geopolitical developments, hike in interest rates, passage of the tax act and lack of any significant progress on the regulatory reforms proposed by the Trump administration should have incited volatility. However, subdued inflation in the United States and marginal increase in long-term interest rates along with absence of specific catalysts have been a drag.

At an investor conference in early December 2017, Marianne Lake, the chief financial officer at JPMorgan, stated that the company’s trading business till then in the fourth quarter was down roughly 15% year over year. Lake further said “there haven’t been that many catalysts” and volatility remains "low across the spectrum."

Similar to the last couple of quarters, lower fixed income trading is expected to be primarily responsible for lower trading revenues in the to-be-reported quarter. The Zacks Consensus Estimate for fixed income trading revenues of $2.86 billion reflects a decline of 15.3% from the year-ago quarter. On the other hand, the consensus estimate for equity trading revenues of $1.57 billion indicates a marginal rise from the last-year quarter.

Here are the other factors that might influence JPMorgan’s Q4 results:

Continuation of investment banking strength: The trend of pocketing solid advisory and underwriting fees might have continued in the to-be-reported quarter primarily on the back of higher debt origination and equity issuances.

As the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. As debt origination fees account for about half of total investment banking fees for JPMorgan, this will lead to strong gains.

Also, despite being seasonally weak quarter for equity issuances globally, fourth-quarter 2017 is expected to be an exception. Strong rally in the equity markets across the globe might have propelled IPOs and follow-on offerings. So, the related fees are projected to increase for JPMorgan.

The company projects investment banking income to be up in high-single-digits range for the fourth quarter.

Steady rise in net interest income: In addition to higher interest rates, a moderate improvement in lending — particularly, in the areas of commercial and industrial, real estate and consumer — will likely result in improvement in interest income.

Slowdown in mortgage banking: With the refinance boom nearing its end, a big help is not expected from this segment. Seasonality is also expected to hurt mortgage banking revenues. Moreover, JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession. Mortgage banking revenues are expected to be down 7.3% year over year to $1.57 billion.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction will not likely be a major support. Also, there were no major outflows related to legal settlements during the quarter that might impact JPMorgan’s earnings unusually.

Impact of new tax code: In early December 2017 (before the passage of the tax act), JPMorgan executive had noted that the U.S. corporate tax overhaul will hurt earnings in the fourth quarter. The company had expected one-time charge related to cash repatriation to be more than $2 billion.

Here is what our quantitative model predicts:

JPMorgan does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for JPMorgan is -0.05%.

Zacks Rank: JPMorgan carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Also, the Zacks Consensus Estimate for earnings of $1.69 reflects a 1.2% decline on a year-over-year basis. However, the Zacks Consensus Estimate for sales of $24.99 billion show 6.9% growth from the prior-year quarter.

J P Morgan Chase & Co Price and EPS Surprise

J P Morgan Chase & Co Price and EPS Surprise | J P Morgan Chase & Co Quote

Stocks That Warrant a Look

Here are a few major bank stocks that you may want to consider, as our model shows that these have the right combination of elements for an earnings beat this time around:

Wells Fargo WFC, scheduled to report results on Jan 12, has an Earnings ESP of +0.76% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The PNC Financial Services Group PNC has an Earnings ESP of +0.55% and carries a Zacks Rank of 2 (Buy). The company is scheduled to release results on Jan 12.

SunTrust Banks STI has an Earnings ESP of +0.72% and sports a Zacks Rank #1. It is scheduled to report results on Jan 19.

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