It has been about a month since the last earnings report for JPMorgan Chase (JPM). Shares have lost about 8.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is JP Morgan due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
JPMorgan Q2 Earnings & Revenues Beat Estimates
Modest loan growth and higher mortgage banking fees drove JPMorgan’s second-quarter 2019 adjusted earnings of $2.59 per share, which outpaced the Zacks Consensus Estimate of $2.50. Results exclude income tax benefits of $768 million or 23 cents per share. Including this, earnings were $2.82 per share.
Decent loan growth (driven by rise in wholesale and credit card loans) and relatively higher rates supported NII. Moreover, home lending revenues (adjusted basis) rose 4% year over year, mainly due to higher mortgage origination volume. Also, provision for credit losses recorded a decline.
Additionally, card income improved 25%, driven by 8% growth in card loan portfolio. Among other positives, credit card sales volume was up 11% and merchant processing volume grew 12%. Further, Commercial Banking average core balances jumped 1% and Asset Management average loan balances were up 7%.
As expected, both equity trading income (down 12%) and adjusted fixed income trading revenues (3% down) recorded a fall. This led total markets revenues to decline 6% (on adjusted basis).
Further, investment banking fees decreased 14%, with 16% fall in advisory fees and 11% decline in equity underwriting income and 13% drop in debt underwriting fees. Operating expenses increased in the reported quarter.
The overall performance of JPMorgan’s business segments, in terms of net income generation, was weak. All segments, except Corporate & Community Banking and Corporate, reported a fall in net income on a year-over-year basis.
Net income increased 16% to $9.7 billion.
Higher Rates, Loan Growth Aid Revenues, Costs Rise
Net revenues as reported were $28.8 billion, up 4% from the year-ago quarter. Rising rates and growth in balance sheet were the main reasons for the improvement. These positives were partially offset by lower Markets revenues, investment banking fees and mortgage banking fees. Also, the top line beat the Zacks Consensus Estimate of $28.4 billion.
Non-interest expenses (on managed basis) were $16.3 billion, up 2% from the year-ago quarter. The rise was primarily due to investments in business and auto loan depreciation.
Credit Quality: A Mixed Bag
Provision for credit losses was $1.1 billion, down 5% year over year. Also, as of Jun 30, 2019, non-performing assets were $5.3 billion, down 9% from Jun 30, 2018.
However, net charge-offs grew 12% year over year to $1.4 billion.
Strong Capital Position
Tier 1 capital ratio (estimated) was 13.9% as of second-quarter end compared with 13.6% on Jun 30, 2018. Tier 1 common equity capital ratio (estimated) was 12.2% as of Jun 30, 2019, up from 12.0%. Total capital ratio was 15.8% (estimated) at the end of the second quarter compared with 15.5% on Jun 30, 2018.
Book value per share was $73.77 as of Jun 30, 2019 compared with $68.85 on Jun 30, 2018. Tangible book value per common share was $59.42 at the end of June compared with $55.14 a year ago.
Management projects NII to be about $57.5 billion in 2019, down from the prior outlook of more than $58 billion. The change is based on a number of factors, including lower long end rates and expectations of up to three rate cuts this year.
The company expects NII in third-quarter 2019 to be $100-$150 million below the second-quarter level. Further, seasonality will hurt the company’s investment banking fees, despite having a strong pipeline. Notably, debt underwriting is expected to be muted, given the slowdown in acquisition financing activity and refinancing opportunities amid a decent backdrop for new debt issuances owing the rate environment.
For 2019, it expects operating expenses to be approximately $66 billion, up $2.7 billion from 2018 level. This additional spending includes $600 million of new technology investments and $1.6 billion for marketing, front-office hiring, new branches and a new headquarters building.
Net charge-offs are expected to be $5.5 billion in 2019, up from $4.9 billion recorded in 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, JP Morgan has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, JP Morgan has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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