JPMorgan’s Swelling Legal Provisions Do Not Undermine Strong Q3 Performance

-4.38%
Downside
200
Market
191
Trefis
JPM: JP Morgan Chase logo
JPM
JP Morgan Chase

JPMorgan Chase (NYSE:JPM) reported slightly worse-than-expected numbers for the third quarter of the year on Tuesday, October 14, [1] and investors were initially not thrilled. The bank’s shares lost almost 4% of their value within minutes of the opening bell, as investors reacted to the unexpected $1 billion in legal reserves which JPMorgan set aside to cover costs from the ongoing foreign exchange investigation. However, as the bank’s strong underlying performance for the quarter became apparent, the trend reversed over the rest of the day and the shares closed about flat.

JPMorgan posted a strong operating performance across divisions for Q3, with the bank reporting year-on-year growth in its retail and commercial loan portfolios, client investment assets and credit card volumes. Notably, the bank reported a year-on-year increase in trading revenues this time around after witnessing sharp declines for the first two quarters of the year. JPMorgan is also likely to meet its target of bringing operating expenses below the $58 billion mark this year – highlighting the effectiveness of the cost cutting measures it has implemented in recent quarters.

We maintain our $65 price estimate for the bank’s shares. This is more than 10% ahead of its current market price.

Relevant Articles
  1. Up 38% Since The Start Of 2023, What Is Next For JPMorgan Stock?
  2. Up 6% In The Last Six months, What’s Next For JPMorgan Stock?
  3. JPMorgan Stock Topped The Consensus In Q2
  4. What To Expect From JPMorgan Stock?
  5. What To Expect From JPMorgan Stock In Q1?
  6. Is JPMorgan Stock Fairly Priced?

See our full analysis of JPMorgan

Higher Underwriting Fees, Trading Revenues Help Boost Top Line

JPMorgan reported total revenues of $8.8 billion for its corporate and investment banking division, which includes its advisory and underwriting, trading as well as treasury and securities services operations. The trading unit was responsible for $4.75 billion of this figure – a small improvement from the figure in Q2 2014 as well as Q3 2013. However, it was the first time since Q2 2013 that JPMorgan’s total trading revenues saw a year-on-year increase – especially since these revenues fell by more than 10% year-on-year for each of the last two quarters.  Also, the bank’s global M&A advisory and underwriting fees for the period improved slightly compared to the figure for the previous year, as the bank benefited from a surge in M&A as well as equity capital market activity for the period.

On the flip side, JPMorgan’s compensation expenses for the corporate and investment banking division jumped 20% year-on-year in Q3 2014 to cross $2.8 billion – almost reaching the bonus-inflated figure for the first quarter of the year.  However, the fact that the ratio of compensation expense to total revenues for the quarter was around the historical average of 32% means that the higher compensation figure is not really a cause for concern.

Retail Banking Business Also Chips In With Strong Performance

JPMorgan also saw an improvement in performance for its other operating divisions over the quarter. The bank’s consumer and business division, which includes banking services offered to retail customers (credit cards, mortgages and deposits) as well as small businesses, bettered its record performance in Q2 to churn out pre-tax profits in excess of $1.5 billion in Q3 from revenues of $4.6 billion. Client assets continued to swell, and touched a record $208 billion. Mortgage origination volumes increased 26% quarter-on-quarter to $21.2 billion. The bank also saw increased payment activity over the quarter, with credit card charge volume growing to almost $120 billion and merchant processing volume crossing $213 billion – both the highest since the economic downturn. At the same time, expenses remained under control, and as a result the overhead ratio (defined by the bank as the ratio of non-interest expenses to total revenues) fell to 65% – the best since 2008.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. 3Q14 Earnings Press Release, JPMorgan Press Releases, Oct 14 2014 []