High Rates to Aid JPMorgan (JPM) Q3 Earnings, IB to Hurt
JPMorgan JPM, slated to kick-start third-quarter 2023 earnings with other major industry players this Friday, Oct 13, is likely to have gained from high interest rates. Further, the acquisition of First Republic Bank in May is expected to continue benefiting its financials. These factors are likely to have supported the company’s net interest income (NII).
The Federal Reserve continued to tighten its monetary policy (pausing hikes in the September FOMC meeting), increasing interest rates by another 25 basis points during the quarter. Thus, the policy rate now stands at a 22-year high of 5.25-5.5%. This, along with the FRC deal, is likely to have favored JPM’s net interest margin (NIM) and NII.
Nonetheless, the inversion of the yield curve in the September-ended quarter, a slowdown in deposit growth and rising funding costs are expected to have weighed on NIM to some extent. Also, a subdued lending scenario amid an uncertain macroeconomic backdrop is likely to have hampered NII and NIM growth.
Per the Fed’s latest data, the demand for commercial and industrial loans was weak in July and August, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
The Zacks Consensus Estimate for JPMorgan’s average earning assets is pegged at $3.4 trillion, indicating a 1.6% rise on a year-over-year basis. Our estimate for the metric stands at $3.47 trillion, implying 3.7% growth.
The Zacks Consensus Estimate for NII (reported) of $22.2 billion suggests a 26.7% increase. Our estimate for NII implies a jump of 42.4% to $22.6 billion.
Other Factors to Impact Q3 Results
Markets Revenues: Market volatility and client activity were subdued in the third quarter due to seasonality. Also, the risks of an economic downturn, central banks’ hawkish monetary policy stance to stem out “sticky” inflation and geopolitical concerns led to ambiguity among investors.
Thus, these factors resulted in lower volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. Hence, JPMorgan is likely to have recorded a weak performance in markets revenues (comprising nearly 20% of the company’s total revenues) this time.
Further, tougher comps from the prior year are expected to have weighed on JPM’s year-over-year performance. The consensus estimate for equity markets revenues of $2.29 billion suggests a slight fall. The Zacks Consensus Estimate for fixed-income markets revenues of $4.48 billion indicates a marginal rise.
Our estimates for equity markets revenues and fixed-income markets revenues stand at $2.08 billion and $4.58 billion, respectively.
Management expects markets revenues to be down 1-2% year over year and sequentially.
Investment Banking (IB) Fees: Global deal-making witnessed a slight rebound in the third quarter, but on a year-over-year basis, M&A activities remained subdued. Headwinds like geopolitical tensions, government shutdown, inflation, rising interest rates and fears of a global economic slowdown continued to weigh on deal-making.
Thus, both the deal volume and total value numbers were weak in the third quarter, though JPMorgan’s leadership in the space is likely to have offered some support to advisory fees.
In the to-be-reported quarter, the IPO market witnessed considerable activity, with a total of 26 initial public offerings jointly raising $7.7 billion. The amount matches the total proceeds raised in the whole of 2022. The performance was still subdued and nowhere near normal.
Further, follow-up equity issuances were soft in the to-be-reported quarter, while bond issuance volume improved from the prior-year quarter. Hence, JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have been slightly hurt during the September-ended quarter.
The consensus estimate for IB revenues is pegged at $1.52 billion. Our estimate for the metric stands at $1.69 billion.
Management expects IB revenues to be down 1-2% year over year and sequentially.
Mortgage Banking Fees: Mortgage originations, both purchase and refinancing, continued to decline in the third quarter. Mortgage banking revenues also faced tough comps from the prior year, which were boosted by lower mortgage rates. In the to-be-reported quarter, mortgage rates continued to rise, with the rate on a 30-year fixed mortgage reaching 7.31% in September, the highest level in nearly 23 years.
Higher mortgage rates, which kept home buyers on the sidelines, led to a smaller origination volume. These factors are likely to have weighed on JPMorgan’s mortgage banking income.
The consensus estimate for mortgage fees and related income of $263.8 million implies a slide of 16% from the prior-year quarter. Our estimate for the metric stands at $260.5 million, indicating a 45.8% plunge.
Expenses: JPMorgan’s plan of entering new markets by opening branches, which is already on track, along with inorganic expansion efforts, is likely to have resulted in an increase in operating expenses in the third quarter. Also, investments in technology to strengthen digital offerings might have led to a rise in costs.
Our estimate for non-interest expenses stands at $21.93 billion, implying an increase of 14.3% on a year-over-year basis.
Asset Quality: JPMorgan is expected to have set aside a large amount of money for potential bad loans, given the global slowdown risk due to geopolitical and macroeconomic concerns and tighter financial conditions.
Our estimate for provision for credit losses is pegged at $2.13 billion, suggesting a rise of 38.6% year over year.
The Zacks Consensus Estimate for non-performing loans (NPLs) of $7.02 billion implies a 5.2% increase year over year. The consensus estimate for non-performing assets (NPAs) of $7.68 suggests a 6% rise. Our estimates for NPAs and NPLs are pegged at $7.57 billion and $7.2 billion, respectively.
What the Zacks Model Unveils
Our proven model doesn’t conclusively predict an earnings beat for JPMorgan this time. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to 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 -0.51%.
Zacks Rank: It currently carries a Zacks Rank #2 (Buy).
JPMorgan Chase & Co. Price and EPS Surprise
JPMorgan Chase & Co. price-eps-surprise | JPMorgan Chase & Co. Quote
The Zacks Consensus Estimate for third-quarter earnings has been revised marginally north to $3.85 over the past seven days. The estimated number indicates a jump of 23.4% from the year-ago reported number. Our estimate for earnings stands at $3.39.
Also, the consensus estimate for sales of $39.11 billion suggests a 19.6% year-over-year rise. Our estimate for sales is pegged at $36.62 billion, up 11.1%.
Major Banks Worth a Look
Here are a couple of major bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time:
The Earnings ESP for Wells Fargo WFC is +3.83% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2023 results on Oct 13.
Over the past seven days, the Zacks Consensus Estimate for WFC’s quarterly earnings has remained unchanged.
PNC Financial PNC is scheduled to release third-quarter 2023 earnings on Oct 13. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.60%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PNC’s quarterly earnings estimates have moved marginally lower over the past week.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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