JPMorgan Shares Rise As Solid Performance Lifts Q2 Results
JPMorgan Chase’s (NYSE:JPM) shares gained 3.5% over trading on Tuesday, July 15, after the country’s largest bank comfortably beat expectations from its diversified banking operations for the second quarter [1] The bank’s statement in early May that poor debt trading activity was likely to shave off roughly 20% of its trading revenues compared to the year-ago period led to low expectations among investors for all banks. [2] But the trading desks fared better than initially predicted, with total revenues of $4.6 billion representing a much lower 14% decline year-on-year and an 8% fall quarter-on-quarter.
More importantly, the bank did well to recover from the decline in profitability witnessed for each of its business divisions in Q1 2014. There was a sequential improvement in revenues for each business division, and all of them except for the Corporate and Investment Banking division also saw a sequential growth in pre-tax profits. The improvement in JPMorgan’s Consumer and Community Banking division stands out here, as pre-tax profit of $5 billion for the quarter was just slightly below the $5.1 billion figure for Q2 2013 despite the fact that provisions for loan losses in Q2 2014 were $852 million compared to net recoveries of $19 million a year ago.
In view of the better-than-expected performance of the bank’s investment banking as well as retail banking operations, we increased our price estimate for JPMorgan’s shares from $62 to $63. This is roughly 10% ahead of its current market price.
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Lukewarm Trading Revenues Better Than Expected
JPMorgan reported total revenues of just under $9 billion for its Corporate & Investment Bank division, which includes its advisory and underwriting, sales and trading as well as treasury and securities services operations. While 9% below the $9.9 billion level seen last year, this was still 4% better than performance for the previous quarter. The trading desks (both FICC and equities) were responsible for $4.6 billion of this figure – more than half the revenues for the division. While this is well below the 60% share of quarterly divisional revenues that trading contributes on average, it is a definite improvement compared to the first quarter – especially since investment banks generally report a peak in trading revenues for the first quarter of the year. As the impact of the Fed’s tapering plan improves interest rates in the economy, we expect trading activity to normalize and trading yields to improve over subsequent quarters.
Consumer And Business Banking Division Boosted Q2 Results
The star in JPMorgan’s Q2 performance was undoubtedly its Consumer and Business Banking division, which includes banking services offered to retail customers (credit cards, mortgages and deposits) as well as small businesses. Business banking in particular posted impressive results, originating a record $1.9 billion in loans for the quarter – 46% higher than the $1.3 billion in Q2 2013 and up 27% compared to the $1.5 billion in Q1 2014. Client assets also swelled to a record $205 billion, helping non-interest revenues for the division jump to an all-time high of $1.8 billion. A continued focus on keeping expenses under control allowed the overhead ratio (defined by the bank as the ratio of non-interest expenses to total revenues) to improve to 66% – the best since the economic downturn.
The impact of the improving overhead ratio on JPMorgan’s share price can be best understood by making to the chart below, which represents the operating margin for the division. Note that lower overhead ratios mean better operating margins, as we forecast in this chart.
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Notes:- 2Q14 Earnings Press Release, JPMorgan Press Releases, Jul 15 2014 [↩]
- JPMorgan Sees 20% Drop in Second-Quarter Markets Revenue, Bloomberg, May 3 2014 [↩]