JPMorgan Posts Strong Q1 Results On The Back Of Debt Trading Gains

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JPMorgan Chase (NYSE:JPM) kicked off the earnings season for banks on a high note on Tuesday, April 14, as it churned out a better-than-expected performance for the first three months of the year. ((1Q15 Earnings Press Release, JPMorgan Press Releases, Apr 14 2015)) Notably, the country’s largest banking group witnessed a year-on-year increase in revenues across its operating divisions. Coupled with lower operating as well as legal costs, this translated into improvements in pre-tax earnings for each division compared to the year-ago period.

The highlight of JPMorgan’s results was the strong revenues churned out by its FICC (fixed income, currencies and commodities) trading desk. While the cyclical investment banking business normally generates maximum cash in the first quarter, the FICC trading business has been plagued by weak activity levels for several quarters now. The reversal in fortunes for the business should help JPMorgan maintain its extremely diversified business model even as stringent capital requirements put pressure on such models. Investors were clearly happy with the results, as they sent the bank’s shares 3.3% higher within two days of the results announcement.

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We maintain our $67 price estimate for JPMorgan’s shares, which is about 5% ahead of its current market price.

See our full analysis of JPMorgan

Surge In Trading Revenues Puts Spotlight On Investment Banking Division

JPMorgan reported total revenues of $9.6 billion for its corporate & investment banking division, which includes its advisory, underwriting, trading, treasury and securities services operations. The trading unit was responsible for just under $5.7 billion of this figure – making this the best performance for the trading desks since Q1 2013. Trading revenues were 9% higher than the figure for the year-ago period and a whopping 56% better sequentially. While investment banks normally report a peak in trading revenues for the first quarter, JPMorgan benefited from the surge in debt as well as currency trading activity this time around, thanks to the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc. The FICC trading desk roped in more than $4 billion in revenues for the first time since in 7 quarters. Notably, the equities trading desk also put up its best performance since Q1 2009 to churn out $1.6 billion in revenues.

JPMorgan’s M&A advisory unit also chipped in with $542 million in revenues for Q1 2015 – the first time these revenues have crossed half a billion dollars in four years. While an overall strong performance for the division helped revenue figures, the fact that the results were not bogged down by over-sized legal charges this time around helped the benefits trickle down to the bottom line. The division reported a pre-tax income figure just shy of $4 billion, making it the best performance in this regard since early 2013. It must be remembered here that compensation expenses are highest for investment banks in the first quarter due to additional bonus payments. The fact that pre-tax income figures have improved considerably – despite the bank spending $3 billion on employee-related expenses – demonstrates how strong the performance for this quarter really was.

Retail Banking Business Does Well Despite Continuing Pressure On Interest Margins

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, saw its total deposit base swell past $500 billion for the first time ever this quarter. Total period-end deposits of $515 billion represent a 5% growth compared to the figure for the previous quarter and an 8% improvement year-on-year. Client assets continued to swell and touched a record $219 billion. These two factors had a positive impact on non-interest revenues for the division in Q1 2015 – mitigating the effect of a sharp reduction in interest income. Notably, JPMorgan’s interest rate spread fell to below 2% for the first time in its history, resulting in an all-time low net interest margin figure of 2.07%

There was good news for JPMorgan on other fronts too. Mortgage origination volumes increased 45% quarter-on-quarter to just under $25 billion. The bank also saw increased payment activity over the quarter, with credit card charge volume growing to almost $113 billion (up 8% compared to Q1 2014) and merchant processing volume crossing $221 billion (a 13% increase over Q1 2014). The bank also originated a record $7.3 billion in auto loans over the quarter.

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