Why Is JP Morgan (JPM) Up 2.9% Since Last Earnings Report?
It has been about a month since the last earnings report for JPMorgan Chase (JPM). Shares have added about 2.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is JP Morgan due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
JPMorgan's Q3 Earnings Beat on Loans & Higher Rates
Higher-than-expected equity trading revenues and rise in demand for loans drove JPMorgan’s third-quarter 2018 earnings of $2.34 per share, which outpaced the Zacks Consensus Estimate of $2.24. The figure was up 33% from the prior-year quarter.
As expected, Markets revenues recorded a fall. A 17% rise in equity trading income was more than offset by 10% decline in fixed income trading revenues. Further, home lending business revenues fell 16% year over year, mainly due to lower net servicing revenues and production margin compression.
Further, operating expenses increased in the reported quarter.
Notably, investment banking fees were relatively stable, with 40% jump in equity underwriting fees offset by decline in advisory fees and debt underwriting fees.
Decent loan growth (driven largely by improved wholesale and credit card loans) and rise in interest rates aided net interest income growth. The reported quarter also recorded a decline in provision for credit losses. Further, lower tax rate supported profitability during the quarter.
Among other positives, credit card sales volume was up 12% and merchant processing volume grew 14%. Further, Commercial Banking average core balances jumped 4% and Asset Management average loan balances rose 12%.
The overall performance of JPMorgan’s business segments, in terms of net income generation, was decent. All segments, except Corporate, reported a rise in net income on a year-over-year basis.
Net income was up 24% from the prior-year quarter to $8.4 billion.
Equity Trading Income, Higher Rates & Loan Growth Aid Revenues
Net revenues as reported were $27.3 billion, up 5% from the year-ago quarter. Also, the top line beat the Zacks Consensus Estimate of $27.2 billion. Rising rates, loan growth and increase in Markets non-interest revenues were the main reasons for the improvement. The positives were partially offset by a decline in mortgage banking income.
Non-interest expenses (on managed basis) were $15.6 billion, up 7% from the year-ago quarter. The rise was primarily due to higher compensation expenses, investments in technology and auto loan depreciation.
Credit Quality Improves
Provision for credit losses was $948 million, down 35% year over year. As of Sep 30, 2018, non-performing assets were $5.0 billion, down 18% from Sep 30, 2017.
Also, net charge-offs declined 18% year over year to $1 billion.
Strong Capital Position
Tier 1 capital ratio (estimated) was 13.6% as of third-quarter end compared with 14.1% on Sep 30, 2017. Tier 1 common equity capital ratio (estimated) was 12.0% as of Sep 30, 2018, down from 12.5% a year ago. Total capital ratio came in at 15.4% (estimated) as of Sep 30, 2018 compared with 16.1% on Sep 30, 2017.
Book value per share was $69.52 as of Sep 30, 2018 compared with $66.95 on Sep 30, 2017. Tangible book value per common share came in at $55.68 at the end of September compared with $54.03 a year ago.
2018 Outlook
NII is expected to be roughly $55.5 billion (up from $50 billion in 2017), benefiting from loan growth and higher rates.
Average core loan growth (excluding CIB loans) is expected to be in the range of 6-7%. Further, management projects C&I loans to grow in the mid-single-digit rates.
The new revenue recognition accounting rule is expected to increase non-interest revenues by nearly $1.2 billion, with the majority of impacts on the Asset & Wealth Management segment. Excluding this impact, non-interest revenues are projected to be up 7-8%.
The new revenues recognition accounting rule is expected to increase expenses by nearly $1.2 billion with the majority of impacts on the AWM segment. Excluding this impact, JPMorgan expects adjusted expenses to be nearly $63.5 billion.
As a result of the Tax Cuts and Jobs Act, effective tax rate is expected to be nearly 20%. This lower effective tax rate is expected to reduce tax-equivalent revenues and income tax expenses by $1.2 billion on an annual run-rate basis.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
VGM Scores
At this time, JP Morgan has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise JP Morgan has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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