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Trading, Investment Banking to Mar JPMorgan (JPM) Q1 Earnings

Zacks Equity Research

JPMorgan’s JPM trading revenues in first-quarter 2019 are likely to be affected by lower volumes and decline in client activities. As trading revenues constitute almost one-fifth of the bank’s top line, this is expected to adversely impact its results scheduled to be announced on Apr 12.

During the first quarter, some concerns, including a few lingering ones from the prior quarters like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown continued.  These resulted in lower volatility, which led to decline in client activities.

Also, JPMorgan expects markets revenues to decrease in the "high teens" percentage, following an unusually strong quarter a year ago. Fall in the currencies and emerging markets units might be the primary reasons.

Both equity and bond trading were responsible for dismal trading revenues. The Zacks Consensus Estimate for equity trading revenues of $1.61 billion reflects a decline of 20% from the prior-year quarter. Also, per the consensus estimate, fixed income trading revenues will likely be down 7.8% year over year to $4.20 billion.

Apart from these, here are some other major factors that will likely impact JPMorgan’s first-quarter results:

Dismal investment banking performance: Prolong government shutdown at the beginning of the quarter, relatively higher interest rates and fears of economic slowdown hurt investment banking revenues. Hence, JPMorgan’s equity underwriting fees and debt origination fees (accounting for almost 60% of total investment banking fees) are expected to be adversely impacted, while its top position in the market may offer some respite.

While dealmakers across the globe were active during the first quarter, global deal value and volume witnessed a decline owing to increase 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 will likely provide some leverage.

Notably, the consensus estimate for total banking revenues (of which investment banking revenues constitutes a major portion) of $3.13 billion indicates 4.2% increase from the prior-year quarter.

Muted mortgage banking: With the refinance boom almost ending and interest rates relatively high, a big help is not expected from this segment. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter, mainly due to lower refinancing activities and fall in originations.

The bank is also facing difficulties in expanding the operation, given the increase in competition and fall in home-buying appetite. As JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, it is expected to witness slight growth in the same.

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.

The company expects expenses to be up in mid-single digits on year-over-year basis.

Net interest income growth to be modest: A decent lending scenario — mainly in the areas of commercial and industrial and consumer — during the first quarter will likely lead to an increase in net interest income (NII). Also, the December 2018 rate hike will have a slight positive impact on the company’s net interest margin despite flattening of the yield curve and steadily increasing deposit betas.

Also, the Zacks Consensus Estimate for average interest earning assets of $2.30 trillion for the first quarter indicates 4.2% year-over-year increase. This, along with modest lending activities, is projected to boost the company’s NII in the to-be-reported quarter.

Besides, management expects NII to be nearly stable sequentially, given the benefits from higher rates and loan growth offset by lower day count.

Here is what our quantitative model predicts:

The chances of JPMorgan beating the Zacks Consensus Estimate this time are low as it doesn’t have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

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 -0.43%.

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, Consensus and EPS Surprise


JPMorgan Chase & Co. Price, Consensus and EPS Surprise | JPMorgan Chase & Co. Quote

The Zacks Consensus Estimate for earnings of $2.32 reflects 2.1% decline on a year-over-year basis. Further, the consensus estimate for sales of $28 billion shows 0.1% rise.

Stocks That Warrant a Look

Here are a few 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:

Comerica Incorporated CMA is scheduled to release results on Apr 16. It has an Earnings ESP of +0.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bank of New York Mellon Corporation BK is scheduled to release results on Apr 17. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.17%.

The Earnings ESP for BankUnited, Inc. BKU is +1.89% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Apr 24.

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