JPMorgan beats expectations, helped by loan growth and cost controls

By Sweta Singh and David Henry

(Reuters) - JPMorgan Chase & Co (JPM.N) reported a marginally lower second-quarter profit on Thursday but still beat subdued analyst expectations, helped by loan growth and a tight control on operating expenses.

The biggest U.S. bank by assets said its profit slipped 1 percent versus the same period a year earlier, as it set aside more money to meet future loan losses.

However, its earnings per share of $1.55 handsomely beat the average analyst estimate of $1.43 per share, according to Thomson Reuters I/B/E/S. Analysts have reduced their forecasts for big banks in recent weeks.

JPMorgan shares were 2.4 percent higher in premarket trading.

The bank’s average book of core loans during the quarter – those related to ongoing businesses it plans to maintain – grew 16 percent, with particular expansion in mortgages and commercial real estate. Even as deposits grew, the portion it lent out also rose to 66 percent, compared with 61 percent a year ago and 64 percent in the prior quarter.

On a conference call with journalists, Chief Financial Officer Marianne Lake said loan growth was “broad-based” and reflected strength in the U.S. economy.

Overall, JPMorgan’s second-quarter net income slipped to $6.20 billion in the second quarter ended June 30 from $6.29 billion a year earlier. Net revenue rose 3 percent to $25.21 billion from $24.53 billion.

Even as business grew last quarter, JPMorgan managed to keep down costs apart from technology. Overall operating expenses fell 6 percent compared with the year-earlier period.

“JPMorgan continues to execute really well in a tough environment,” said Evercore ISI analyst Glenn Schorr, noting that the bank beat his expectations not only in loan growth, but also in fixed income trading, investment banking and expenses.

JPMorgan is the first U.S. bank to announce results for the quarter, as well as the first to report since Britain voted on June 23 to leave the European Union.

The vote to leave the EU, known as Brexit, helped capital markets revenue at JPMorgan. Trading volumes soared as investors scrambled to react to the vote, helping to boost the bank’s fixed-income trading revenue by 35 percent last quarter.

So far in the third quarter, trading volumes have been “fine,” but a normal seasonal decline is expected, Lake said.

Perhaps more important than the trading bump, Brexit threw into doubt the likelihood of a U.S. interest rate hike anytime soon. That means lending margins for big banks will remain under pressure.

Although JPMorgan benefited from higher rates in the second quarter compared with the year-ago period, its net interest margin declined from the first quarter.

Another symptom of the bank’s struggle with low rates was its return on tangible common equity, a key measure of profitability. The ratio fell to 13 percent from 14 percent a year earlier. Management has said it should be about 15 percent, but to get there, the bank needs higher interest rates.

The Federal Reserve last raised U.S. rates in December, by 0.25 percentage points, after keeping them near zero for almost a decade.

At the start of the year, it was widely expected there would be two U.S. rate hikes this year. Now, Wall Street’s top banks are almost evenly split on whether the Fed will raise rates at all this year, according to a Reuters poll.

Brexit also raised questions about whether banks will shift some of their London operations to other cities.

After the vote, JPMorgan said it was considering changes that could result in moving some of its 16,000 UK-based employees. On Thursday, Lake said dialogues about staff moves are “only in their infancy.”

Wells Fargo & Co (WFC.N) and Citigroup Inc (C.N) the third- and fourth-biggest U.S. banks, report results on Friday.

(Reporting by Sweta Singh in Bengaluru and David Henry in New York; Writing by Lauren Tara LaCapra; Editing by Chizu Nomiyama and Nick Zieminski)