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JPMorgan (JPM) Q2 Earnings Beat on Higher Trading & Loans


Higher-than-expected trading revenues and rise in demand for loans drove JPMorgan’s JPM second-quarter 2018 earnings of $2.29 per share, which outpaced the Zacks Consensus Estimate of $2.22. The figure was up 26% from the prior-year quarter.

The stock rose nearly 1% in the pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Unexpected improvement in trading activities, mainly driven by escalating trade war tensions between the United States and China boosted JPMorgan’s markets revenues. Fixed income trading and equity trading revenues were up 7% and 24%, respectively.

Further, higher investment banking fees (up 17%), with equity underwriting and advisory supporting the growth, acted as a tailwind. Nevertheless, mortgage banking income declined owing to lower mortgage origination volume.

Decent loan growth (driven mainly by improved wholesale and credit card loans) and rise in interest rates aided net interest income growth. The reported quarter also recorded stable provision for credit losses. Further, lower tax rate supported profitability during the quarter.

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

Among other positives, credit card sales volume was up 11% and merchant processing volume grew 12%. Further, Commercial Banking average core loan balances grew 4% and Asset Management average loan balances rose 12%.

Net income was up 18% year over year to $8.3 billion.

Trading Income, Higher Rates & Loan Growth Support Revenues

Net revenues as reported were $27.8 billion in the quarter, up 8% from the year-ago quarter. Also, the tally topped the Zacks Consensus Estimate of $27.6 billion. Rising rates, loan growth and increase in Markets revenues were the main reasons for the improvement. These were partially offset by lower mortgage banking fees and Card net interchange income.

Non-interest expenses (on managed basis) were $16 billion, up 8% from the year-ago quarter. The rise was primarily due to higher compensation expenses, investments in technology and auto loan depreciation.

Credit Quality Improves

Provision for credit losses were $1.2 billion, relatively stable year over year. Also, as of Jun 30, 2018, non-performing assets were $5.8 billion, down 10% from the year-ago period.

However, net charge-offs rose 4% year over year to $1.3 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 13.6% as of Jun 30, 2018 compared with 14.2% as of Jun 30, 2017. Tier 1 common equity capital ratio (estimated) was 11.9% as of Jun 30, 2018, down from 12.5% a year ago. Total capital ratio came in at 15.4% (estimated) as of Jun 30, 2018 compared with 16.0% as of Jun 30, 2017.

Book value per share was $68.85 as of Jun 30, 2018 compared with $66.05 as of Jun 30, 2017. Tangible book value per common share came in at $55.14 at the end of June compared with $53.29 a year ago.

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.

However, slowdown in mortgage business is likely to continue in the near term for JPMorgan. Also, rise in operating expenses makes us apprehensive.

JPMorgan Chase & Co. Price, Consensus and EPS Surprise

JPMorgan Chase & Co. Price, Consensus and EPS Surprise | JPMorgan Chase & Co. Quote

JPMorgan currently 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, Bank of America BAC will report second-quarter results on Jul 16, Comerica Incorporated CMA on Jul 17 and U.S. Bancorp USB on Jul 18.

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