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Trading & Loan Growth to Drive JPMorgan's (JPM) Q2 Earnings

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After an impressive first-quarter performance driven by significant volatility, client activity has returned to normalized levels. So, this will likely result in relatively stable trading revenues for JPMorgan JPM in second-quarter 2018. As trading revenues constitute roughly one-fifth of the bank’s top line, this is expected to lend support to its results scheduled to be announced on Jul 13.

Unlike the first quarter when higher inflation expectation, tightening of monetary policy by the Fed, impending U.S.-China trade war and a sharp sell-off in the tech sector incited volatility, developments like further escalation in the trade war and some other geo-political tensions in the second quarter were not enough to lead to substantial rise in client activity.

Further, at an investors’ conference in May, JPMorgan’s head of Corporate and Investment Banking division, Daniel Pinto projected flat year-over-year markets revenues in the second quarter.

Nonetheless, similar to the prior quarters, equity trading revenues are expected to render support to the total trading revenues in the to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.75 billion reflects an increase of 10% from the year-ago quarter. Notably, per the consensus estimate, fixed income trading revenues will remain flat year over year at $3.22 billion.

Apart from this, here are some of the other factors that are anticipated to influence JPMorgan’s second-quarter results:

Steady rise in net interest income: A modest improvement in lending — mainly in the areas of commercial and industrial, and consumer — will likely lead to an increase in net interest income (NII). A rise in interest rates will provide some support despite flattening of the yield curve in the second quarter.

Also, the Zacks Consensus Estimate for average interest earning assets of $2.21 trillion for the second quarter indicates an increase of 1.7% year over year. This along with decent lending activities is projected to boost the company’s NII in the to-be-reported quarter.

Subdued investment banking performance: Equity issuances across the globe seem to have gotten a boost from IPOs and follow-on offerings. Therefore, JPMorgan is expected to record a slight increase in equity underwriting fees in the second quarter.

Also, increasing global M&A activities will likely support the company’s advisory fees to some extent. Further, as JPMorgan remains at the top position when it comes to garnering global investment banking fees, this will likely provide the bank a leverage to attract more business.

However, rise in rates is likely to have slowed down corporates’ involvement in debt issuance activities. As debt origination fees account for about half of total investment banking fees for JPMorgan, this is expected to have an adverse impact on investment banking revenues to some extent.

Slowdown in mortgage banking: With the refinance boom nearing its end, a big help is not expected from this segment. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter. As JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, the company is expected to witness muted growth in the same.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction will not likely be a major support. Also, as JPMorgan is aiming to enter newer markets by opening branches, expenses are likely to remain on the higher side. Further, increased investment in technology to strengthen digital offerings will result in a rise in costs.

Here is what our quantitative model predicts:

The chances of JPMorgan beating the Zacks Consensus Estimate are high this time as it has 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.

Zacks ESP: The Earnings ESP for JPMorgan is +1.19%.

Zacks Rank: JPMorgan carries a Zacks Rank #3, which further increases the predictive power of ESP.

JPMorgan Chase & Co. Price and EPS Surprise


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

Moreover, the Zacks Consensus Estimate for earnings of $2.25 reflects 22% growth on a year-over-year basis. Further, the consensus estimate for sales of $27.5 billion shows 8.1% increase from the prior-year quarter.

Other Stocks That Warrant a Look

Here are a few other 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:

Wells Fargo WFC is scheduled to release results on Jul 13. It has an Earnings ESP of +0.33% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KeyCorp KEY is scheduled to release results on Jul 19. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.47%.

The Earnings ESP for SunTrust Banks STI is +0.45% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 20.

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