- By Margaret Moran
U.S. bank major JPMorgan Chase & Co. (NYSE:JPM), the largest bank in the country by assets, disclosed its earnings results for the third quarter of 2020 before the market opened on Oct. 13.
Despite a turbulent quarter due to the economic downturn and a couple of cases of misconduct, JPMorgan managed to surpass analyst expectations on both the earnings and revenue front. Following the news, the stock price dropped 1.62% throughout the day to close around $100.78.
Highlights from the quarter
JPMorgan recorded revenue of $29.91 billion versus the $28.39 billion that Wall Street had expected. Meanwhile, adjusted earnings per share came in at $2.92 compared to the $2.26 expected.
The strong results were aided by an 11% increase in investment banking, giving the segment 9.4% wallet share year to date and making JPMorgan the world's highest earner in terms of investment banking fees.
The bank also saw a 28% increase in deposits in its consumer banking segment as customers with sufficient income focus more on saving due to the uncertain economic situation.
Overall, assets under management increased 16% to $2.6 trillion, while average loans increased 13% and average deposits increased 23%.
Firmwide, credit costs totaled $611 million, which included $569 million of net reserve releases.
CEO Jamie Dimon had the following to say:
"JPMorgan Chase earned $9.4 billion of net income on nearly $30 billion of revenue and we maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes. We further strengthened our capital and liquidity position, increasing CET1 capital to $198 billion (13.0% CET1 ratio, up 60 basis points after paying the dividend) and liquidity sources to $1.3 trillion. The Corporate & Investment Bank continues to be a big driver of Firm performance with Markets revenue up 30% and Global IB fees up 9%. CIB and Commercial Banking continue to attract and retain deposits given our strong client franchise as our clients remain liquid. Asset & Wealth Management generated record revenue and net income and saw strong net inflows into long-term products."
During the quarter, JPMorgan was accused of, and has admitted to, wrongdoing in the case of its illegal market manipulation practices and agreed to pay a $920 million fine to the Commodity Futures Trading Commission to settle the matter. The investigation found that over an eight-year period, the bank engaged in a practice called "spoofing," in which traders input large buy or sell orders that they have no plans of executing. This results in artificial demand or supply, allowing the bank to move asset prices in whatever direction it wanted. The penalty will be the largest of its kind ever levied by the CFTC, and the charges consist of a $436.4 million fine for illegal activity, $311.7 million in restitution and $172 million in disgorgement.
In another scandal, JPMorgan fired several employees that it said had applied for and received EIDL coronavirus relief funds meant for small business, depositing the money into their personal checking accounts. This came at the conclusion of an internal investigation conducted by the bank after it noticed some suspiciously high deposits made by the employees in question.
For full fiscal 2020, JPMorgan expects around $55 billion in net interest income and adjusted expenses of $66 billion.
In addition to declines in interest income, we can likely expect to see the hefty CFTC fine showing up on JPMorgan's balance sheet over the next few quarters, serving as a further drag on results. However, as long as markets remain volatile and investment dollars keep flowing (regardless of direction), we can likely expect investment banking to continue its growth.
JPMorgan trades with a price-earnings ratio of 13.58 as of the time of writing, which is higher than the industry average but still lower than the intrinsic value estimated by the GuruFocus Value chart. Based on the GF Value, the stock is "modestly undervalued." Even though analysts and historical patterns alike anticipate revenue will stagnate or decline, the stock is still undervalued according to current earnings.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.