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Mute Trading Activities to Hurt JPMorgan (JPM) Q3 Earnings


After a stellar first-half 2018 performance driven by substantial volatility, client activity remained on a lower side. So, this will likely have an adverse impact on JPMorgan’s JPM trading revenues in the third quarter. As trading revenues constitute almost one-fifth of the bank’s top line, this is expected to have an adverse impact on its results scheduled to be announced on Oct 12.

In the first half, higher inflation expectation, tightening of monetary policy by the Fed, the U.S.-China trade war and a sharp sell-off in the tech sector incited volatility. However, developments like further escalation in the trade warand some other geo-political tensions in the third quarter were not enough to lead to a significant rise in client activity.

Further, at an investors’ conference in September, JPMorgan’s CFO, Marianne Lake projected trading revenues to decline in the mid-single digit range, mainly due to the impact of tax overhaul on some of the bank’s markets businesses. Notably, excluding the impact of the tax hit, trading revenues are still expected to be lower by a few percentage points on a year-over-year basis.

Also, the Zacks Consensus Estimate for equity trading revenues of $1.43 billion reflects a plunge of 27% from the prior quarter. Further, per the consensus estimate, fixed income trading revenues will likely be down 2% sequentially to $3.39 billion.

Apart from this, here are some of the other major factors that will likely influence JPMorgan’s third-quarter results:

Dismal investment banking performance: Seasonality hurt investment banking revenues in the third quarter. Also, global equity markets slowed down with fears of a full blown trade war weighing on companies’ plans to raise capital by issuing shares. Nonetheless, JPMorgan’s top position in the market is expected to provide some respite, which may result in a slight increase in equity underwriting fees.

Further, rise in interest rates is likely to have slowed down companies’ involvement in debt issuance activities. As debt origination fees account for about half of total investment banking fees for JPMorgan, this is expected to have an adverse impact on investment banking revenues to some extent.

Also, decline in global M&A deal volume in the third quarter will likely hamper the company’s advisory fees to some extent. Nevertheless, JPMorgan's top position in garnering global investment banking fees, and the strong M&A deal pipeline over the prior quarters are likely provide the bank some leverage in the to-be-reported quarter.

Management projects investment banking fees to be relatively stable in the quarter on a year- over-year basis.

Notably, the consensus estimate for total banking revenues (of which investment banking revenues constitutes a major portion) of $3.06 billion indicated 11.4% decline from the prior quarter.

Decent net interest income growth: A slight improvement in lending scenario — mainly in the areas of commercial and industrial, and consumer — will likely lead to an increase in net interest income (NII). A rise in interest rates (in June and September) will offer some support despite flattening of the yield curve and steadily increasing deposit betas in the third quarter.

Also, the Zacks Consensus Estimate for average interest earning assets of $2.23 trillion for the third quarter indicates a slight sequential increase. This along with modest lending activities is projected to boost the company’s NII in the to-be-reported quarter.

Slowdown in mortgage banking: With the refinance boom almost coming to its end, a big help is not expected from this segment. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter. As JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, it is expected to witness muted growth in the same.

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, as JPMorgan’s plan to enter newer markets by opening branches is already a work in progress, operating expenses are likely to remain on the higher side. Further, increased investment in technology to strengthen digital offerings will result in a rise in costs.

Here is what our quantitative model predicts:

We cannot conclusively predict that JPMorgan is likely to beat the Zacks Consensus Estimate this time as it doesn’t have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

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

Earnings ESP: The Earnings ESP for JPMorgan is 0.00%.

Zacks Rank: JPMorgan carries a Zacks Rank #3. This increases the predictive power of ESP, but we need to have positive Earnings ESP to be sure of this.

The Zacks Consensus Estimate for earnings of $2.23 reflects 26.7% growth on a year-over-year basis. Further, the consensus estimate for sales of $27.5 billion shows 8.4% increase from the prior-year quarter.

JPMorgan Chase & Co. Price and EPS Surprise

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

Stocks That Warrant a Look

Here are a few 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:

M&T Bank Corporation MTB is scheduled to release results on Oct 17. It has an Earnings ESP of +0.39% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Hancock Whitney Corporation HWC is +0.79% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 16.

Ameris Bancorp ABCB is scheduled to release results on Oct 19. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +1.11%.

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