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Consumer Loans, Mortgages to Aid JPMorgan (JPM) Q3 Earnings

Zacks Equity Research

JPMorgan’s JPM trading revenues for third-quarter 2019 are likely to be have been adversely impacted by decline in client activities. With trading revenues constitutingnearly 20% of the bank’s total revenues, this might somewhat hurt its results slated on Oct 15, before market open.

During the third quarter, several lingering concerns,including uncertainty related to the U.S.-China trade war and Brexit, and expectations of global economic slowdown persisted. The Federal Reserve’s accommodative monetary policy stance and many geopolitical matters led to ambiguity too. All these factors weighed on investors’ mind, resulting in lower client activity.

Though decent equity markets performance seems to have resulted in a slight improvement in equity trading, the above-mentioned concerns are expected to have weighed on fixed income trading. Thus, overall growth in trading revenues is likely to have been muted in the to-be-reported quarter.

Apart from these, here are a few other key factors that arelikely to impact JPMorgan’s third-quarter results:

Marginal rise in mortgage banking fees: Mortgage banking business is expected to have provided some support to JPMorgan’s fee income. While concerns like muted home equity loan growth, increase in competition and fall in home-buying appetite continue to hurt mortgage banking fees, lower mortgage rates, which drove the refinancing activities, are expected to have partially offset the woes.

Net interest income not of much support: A dismal lending scenario — mainly in the areas of commercial and industrial, and commercial real estate — during the third quarter is expected to have had an adverse impact on net interest income (NII), while decent consumer loan growth might have been an offsetting factor.

Decline in interest rates (two rate cuts – in July and September) and flattening of the yield curve along with rising deposit betas are likely to have hurt JPMorgan’s net interest margin as well. Further, the company expects NII in the third quarter to have declined $100-$150 million on a sequential basis.

Seasonality mars investment banking performance: Trade concerns, fears of global economic slowdown and seasonality hurt investment banking revenues. While dealmakers across the globe were active during the third quarter, M&A deal value and volume witnessed a falldue to several geopolitical concerns as the companies became more risk-averse.

Therefore, this likely had an adverse impact on JPMorgan’s advisory fees. Nevertheless, the bank's top position in garnering global investment banking fees is likely to have provided some leverage.

Further, despite decent equity markets performance and the central banks’ accommodative stance, corporates seem to be shying away from equity issuances, given the global concerns. The same factors seem have had an unfavorable impact on IPO activity during the to-be-reported quarter. However, overall debt issuances were decent given the lower interest rates.

Hence, growth in JPMorgan’s equity underwriting fees and debt origination fees (accounting for almost 60% of total investment banking fees) is expected to have remained soft, while its top position in the market might have offered some respite.

Management expects debt underwriting to have been muted in the third quarter, given the slowdown in acquisition financing activity and refinancing opportunities amid a decent backdrop for new debt issuances owing the favorable rate environment.

Higher Expenses: As JPMorgan’s plan to enter new markets by opening branches is already a work in progress, operating expenses have likely remained on the higher side. Also, increased investment in technology to strengthen digital offerings has probably resulted in a rise in costs.

Here is what our quantitative model predicts:

Our proven model shows that JPMorgan has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — that increase 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.

Earnings ESP: The Earnings ESP for JPMorgan is +0.34%.

Zacks Rank: It carries a Zacks Rank #3, which increases the predictive power of ESP.

JPMorgan Chase & Co. Price and EPS Surprise


JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. price-eps-surprise | JPMorgan Chase & Co. Quote

The Zacks Consensus Estimate for earnings of $2.44 indicates 4.3% rise from the year-ago reported number. Further, the consensus estimate for sales of $28.4 billion suggests 4.2% increase.

Other Major Banks That Warrant a Look

Here are a few other 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:

The Earnings ESP for Wells Fargo WFC is +5.79% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 15.

Citigroup C is scheduled to release results on Oct 15. The company has an Earnings ESP of +0.51% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BB&T Corp BBT is +0.19% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Oct 17.

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