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JPMorgan (JPM) Q2 Earnings Top, Stock Down on Dismal Outlook

Zacks Equity Research

Modest loan growth and higher mortgage banking fees drove JPMorgan’s JPM second-quarter 2019 adjusted earnings of $2.59 per share, which outpaced the Zacks Consensus Estimate of $2.50. Results exclude income tax benefits of $768 million or 23 cents per share. Including this, earnings were $2.82 per share.

However, the stock fell 1.6% in pre-market trading, as management provided dismal lending scenario expectation for the second half of the year. Management now expects net interest income (NII) to be roughly $57.5 billion, down from the prior guidance of more than $58 billion.

Decent loan growth (driven by rise in wholesale and credit card loans) and relatively higher rates supported NII. Moreover, home lending revenues (adjusted basis) rose 4% year over year, mainly due to higher mortgage origination volume.

Additionally, card income improved 25%, driven by 8% growth in card loan portfolio. Among other positives, credit card sales volume was up 11% and merchant processing volume grew 12%. Further, Commercial Banking average core balances jumped 1% and Asset Management average loan balances were up 7%.

Also, provision for credit losses recorded a decline.

As expected, both equity trading income (down 12%) and adjusted fixed income trading revenues (3% down) recorded a fall. This led total markets revenues to decline 6% (on adjusted basis). Further, investment banking fees decreased 14%, with 16% fall in advisory fees and 11% decline in equity underwriting income and 13% drop in debt underwriting fees.

Operating expenses increased in the reported quarter.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was weak. All segments, except Corporate & Community Banking and Corporate, reported a fall in net income on a year-over-year basis.

Net income increased 16% to $9.7 billion.

Higher Rates, Loan Growth Aid Revenues, Costs Rise

Net revenues as reported were $28.8 billion, up 4% from the year-ago quarter. Rising rates and growth in balance sheet were the main reasons for the improvement. These positives were partially offset by lower Markets revenues, investment banking fees and mortgage banking fees. Also, the top line beat the Zacks Consensus Estimate of $28.4 billion.

Non-interest expenses (on managed basis) were $16.3 billion, up 2% from the year-ago quarter. The rise was primarily due to investments in business and auto loan depreciation.

Credit Quality: A Mixed Bag

Provision for credit losses was $1.1 billion, down 5% year over year. Also, as of Jun 30, 2019, non-performing assets were $5.3 billion, down 9% from Jun 30, 2018.

However, net charge-offs grew 12% year over year to $1.4 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 13.9% as of second-quarter end compared with 13.6% on Jun 30, 2018. Tier 1 common equity capital ratio (estimated) was 12.2% as of Jun 30, 2019, up from 12.0%. Total capital ratio was 15.8% (estimated) at the end of the second quarter compared with 15.5% on Jun 30, 2018.

Book value per share was $73.77 as of Jun 30, 2019 compared with $68.85 on Jun 30, 2018. Tangible book value per common share was $59.42 at the end of June compared with $55.14 a year ago.

Bottom Line

Continued improvement in loans, higher rates and branch expansion efforts are likely to support JPMorgan’s revenues. Further, the company’s deal to acquire InstaMed will boost revenues. However, dismal trading and investment banking performance is likely to be a near-term concern for the company.

JPMorgan Chase & Co. Price, Consensus and EPS Surprise

 

JPMorgan Chase & Co. Price, Consensus and EPS Surprise

JPMorgan Chase & Co. price-consensus-eps-surprise-chart | 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.

Performance & Earnings Dates of Other Major Banks

Citigroup’s C second-quarter 2019 adjusted earnings per share of $1.83 handily outpaced the Zacks Consensus Estimate of $1.78. Also, earnings climbed 12% year over year. Lower expenses and higher revenues, backed by consumer banking operations drove the results. However, decline in trading income and dismal investment banking performance were on the downside.

Bank of America BAC and U.S. Bancorp USB will come out with quarterly numbers on Jul 17.

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