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JPMorgan’s (JPM) Q3 Earnings Beat on Loans & Higher Rates


Higher-than-expected equity trading revenues and rise in demand for loans drove JPMorgan’s JPM third-quarter 2018 earnings of $2.34 per share, which outpaced the Zacks Consensus Estimate of $2.24. The figure was up 33% from the prior-year quarter.

The stock rose nearly 1.5% in pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

As expected, Markets revenues recorded a fall. A 17% rise in equity trading income was more than offset by 10% decline in fixed income trading revenues. Further, home lending business revenues fell 16% year over year, mainly due to lower net servicing revenues and production margin compression.

Further, operating expenses increased in the reported quarter.

Notably, investment banking fees were relatively stable, with 40% jump in equity underwriting fees offset by decline in advisory fees and debt underwriting fees.

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

Among other positives, credit card sales volume was up 12% and merchant processing volume grew 14%. Further, Commercial Banking average core balances jumped 4% and Asset Management average loan balances rose 12%.

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.

Net income was up 24% from the prior-year quarter to $8.4 billion.

Equity Trading Income, Higher Rates & Loan Growth Aid Revenues

Net revenues as reported were $27.3 billion, up 5% from the year-ago quarter. Also, the top line beat the Zacks Consensus Estimate of $27.2 billion. Rising rates, loan growth and increase in Markets non-interest revenues were the main reasons for the improvement. The positives were partially offset by a decline in mortgage banking income.

Non-interest expenses (on managed basis) were $15.6 billion, up 7% 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 was $948 million, down 35% year over year. As of Sep 30, 2018, non-performing assets were $5.0 billion, down 18% from Sep 30, 2017.

Also, net charge-offs declined 18% year over year to $1 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 13.6% as of third-quarter end compared with 14.1% on Sep 30, 2017. Tier 1 common equity capital ratio (estimated) was 12.0% as of Sep 30, 2018, down from 12.5% a year ago. Total capital ratio came in at 15.4% (estimated) as of Sep 30, 2018 compared with 16.1% on Sep 30, 2017.

Book value per share was $69.52 as of Sep 30, 2018 compared with $66.95 on Sep 30, 2017. Tangible book value per common share came in at $55.68 at the end of September compared with $54.03 a year ago.

Bottom Line

Continued improvement in loans, higher interest rates and branch expansion efforts are expected to support 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 third-quarter results on Oct 15, Comerica Incorporated CMA on Oct 16 and U.S. Bancorp USB on Oct 17.

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