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JPMorgan (JPM) Q4 Earnings Beat Thanks to Investment Banking


Amid an expected trading weakness, strong investment banking results and higher rates drove JPMorgan’s JPM fourth-quarter 2017 earnings of $1.76 per share, which handily surpassed the Zacks Consensus Estimate of $1.69. Results exclude one-time tax related charge of $2.4 billion or 69 cents per share.

Solid loan growth (driven mainly by improved credit card loans) and higher interest rates supported net interest income growth. Further, rise in investment banking fees and stable equity trading income supported the top line.

As expected, fixed income trading slumped during the quarter. Additionally, a decline in mortgage banking income, due to higher funding costs and fall in mortgage origination volume, was a headwind.

Apart from these, results were adversely impacted by a drastic surge in provision for credit losses, mainly due to reserve build in Card portfolio. Further, higher operating expenses was an undermining factor.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was decent. All segments, except Corporate & Investment Bank, reported a rise in net income on a year-over-year basis.

Among other positives, both credit card sales volume and merchant processing volume grew 13%. Further, both Commercial Banking average core loan balances grew 7% and Asset Management average core loan balances rose 11%.

Net income (excluding charges related to tax act) was down 1% year over year to $6.7 billion.

Trading Weakness Offset by Higher Rates & Loan Growth, Costs Up

Managed net revenues of $25.5 billion in the quarter were up 5% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $25 billion. Rising rates, loan growth and increase in auto lease revenues were the main reasons for the improvement. These were partially offset by lower trading revenues and mortgage banking fees.

Non-interest expenses (on managed basis) were $14.6 billion, up 5% from the year-ago quarter. The rise was primarily due to higher compensation expenses and auto loan depreciation, partially offset by a decline in legal costs.

Provisions Surge

Provision for credit losses soared 51% year over year to $1.3 billion, primarily due to reserve build in Consumer and Wholesale loan portfolios.

However, as of Dec 31, 2017, non-performing assets were $6.4 billion, down 15% from the year-ago period. Also, net charge-offs were down 1% year over year to $1.3 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 13.9% as of Dec 31, 2017 compared with 14.1% as of Dec 31, 2016. Tier 1 common equity capital ratio (estimated) was 12.2% as of Dec 31, 2017, down from 12.4% as of Dec 31, 2016. Total capital ratio came in at 15.9% (estimated) as of Dec 31, 2017 compared with 15.5% as of Dec 31, 2016.

Book value per share was $67.04 as of Dec 31, 2017 compared with $64.06 as of Dec 31, 2016. Tangible book value per common share came in at $53.56 as of Dec 31, 2017 compared with $51.44 as of Dec 31, 2016.

Bottom Line

Continued improvement in loans and higher interest rates are expected to continue supporting JPMorgan’s revenues. With the Fed expected to continue raising rates, the company’s interest income will likely increase. Also, gains from lower tax rates will aid profitability in the quarters ahead.

However, slowdown in trading owing to low volatility and weak mortgage business are likely to continue in the near term.

J P Morgan Chase & Co Price and EPS Surprise

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

Currently, JPMorgan carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other major regional banks, Comerica Incorporated CMA and Citigroup C are scheduled to report on Jan 16, Bank of America BAC will announce results on Jan 17.

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