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Muted Trading Activities to Hurt JPMorgan (JPM) Q2 Earnings

Zacks Equity Research

JPMorgan’s JPM trading revenues for second-quarter 2019 are likely to be affected by lower volumes and decline in client activities. As trading revenues constitute almost 20% of the bank’s revenues, this is expected to adversely impact its results slated on Jul 16, before market open.

During the second quarter, a few concerns, including some lingering ones from the last quarters like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown persisted. The Federal Reserve’s policy accommodation stance led to ambiguity too. All these factors weighed on investors’ mind, resulting in lower volatility. Also, these were not enough to keep trading desks busy.

During an investors conference in late May, JPMorgan CEO Jamie Dimon warned of a decline in trading revenues. The company witnessed a 4-5% fall in trading revenues during the first two months of the second quarter (excluding a gain), while Dimon noted that “the next month could dramatically change that.”

Thus, trading revenues are expected to remain weak during to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.86 billion suggests a decline of 5% from the prior-year reported figure. Per the consensus estimate, fixed income trading revenues are likely to be stable year over year at $3.45 billion.

Apart from these, here are a few other key factors that will likely impact JPMorgan’s second-quarter results:

Muted investment banking performance: Trade concerns and fears of global economic slowdown hurt investment banking revenues. While dealmakers across the globe were active during the second quarter, M&A deal value and volume witnessed a decline owing to rise in borrowing costs and several geopolitical concerns.

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

Decent equity markets performance and the central banks’ dovish stance seem to have supported equity issuance across the globe. This also had a favorable impact on IPO activity to some extent. Nonetheless, relatively higher rates and several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter.

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

Notably, the consensus estimate for total banking revenues (of which investment banking revenues constitutes a major portion) of $2.99 billion indicates 13.3% decrease from the prior-year quarter reported number.

Net interest income not of much support: A dismal lending scenario — mainly in the areas of commercial and industrial, and real estate — during the second quarter will likely have an adverse impact on net interest income (NII). The central bank’s accommodative stance along with flattening of the yield curve and steadily rising deposit betas will hurt JPMorgan’s net interest margin as well.

Though the consensus estimate for average interest earning assets of $2.31 trillion for the second quarter indicates a rise of 4.1% from the year-ago reported figure, muted loan growth is expected to hurt the company’s NII growth.

Mortgage banking to offer some support: In a reversal in trend, mortgage banking is expected to provide some support to JPMorgan’s fee income. While concerns including disappointing home equity loan growth, increase in competition and fall in home-buying appetite are likely to hurt mortgage banking fees to an extent, lower mortgage rates, which drove the refinancing activities and seasonality are expected to partially offset the woes in the to-be-reported quarter.

Expenses to rise: As JPMorgan’s plan to enter new markets by opening branches is already a work in progress, operating expenses will remain on the higher side. Also, increased investment in technology to strengthen digital offerings will result in a rise in costs.

Here is what our quantitative model predicts:

Our proven model shows that JPMorgan does not have the right combination of the two key ingredients — a positive Earnings ESP and 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 0.00%.

Zacks Rank: It carries a Zacks Rank #3, which increases the predictive power of ESP. But we need to have positive earnings ESP to be sure of earnings beat.

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 $2.50 indicates 9.2% rise from the year-ago reported number. Further, the consensus estimate for sales of $28.4 billion suggests 2.4% increase.

Stocks That Warrant a Look

Here are a few 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 +0.11% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 16.

PNC Financial PNC is scheduled to release results on Jul 17. The company has an Earnings ESP of +0.88% 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 Comerica CMA is +0.52% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Jul 17.

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