JPMorgan Makes Up For Weak Q2 Trading Performance By Slashing Costs

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JP Morgan Chase

Strong improvements in lending activity and a significant reduction in operating costs helped JPMorgan Chase (NYSE:JPM) report its best quarterly result since early 2013 for the second quarter of the year on Tuesday, July 14. ((2Q15 Earnings Press Release, JPMorgan Press Releases, July 14 2015)) Although there was a notable decline in debt trading activity over Q2 2015, the impact of this on the top line was mitigated to a large extent by strong gains in investment banking fees as well as equity trading revenues. The bank’s total loan portfolio grew by a strong 3.6% over the quarter, which coupled with the slight uptick in net interest margin (NIM) helped improve total revenues this time around.

The highlight of JPMorgan’s results, however, was the marked improvement in non-interest expenses. The $14.5 billion in non-interest expenses was the lowest reported by the bank since Q3 2010, and was the result of a year-on-year reduction in costs across the retail banking, investment banking and commercial banking divisions.

We maintain a $71 price estimate for JPMorgan’s shares, which is slightly ahead of its current market price.

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Investment Banking Division Saw Mixed Results

JPMorgan reported total revenues of $8.7 billion for its corporate and investment banking division, which includes its advisory, underwriting, trading, treasury and securities services operations. The trading unit was responsible for just over $4.5 billion of this figure. In comparison, total revenues for the division were $9.3 billion a year ago, with trading revenues just shy of $5 billion. While investment banks normally report a peak in trading revenues for the first quarter, the sequential decline is a rather large 22%. Almost all of the decline can be attributed to the FICC trading desk, which generated less than $3 billion in revenues for the quarter – a 21% reduction compared to Q2 2014 and a 29% reduction over Q1 2015. Thankfully, the equities trading desk churned out almost $1.6 billion this quarter – a 27% jump compared to the figure last year.

JPMorgan’s advisory and underwriting operations also did extremely well to report total revenues of $1.75 billion. Although the reporting change which JPMorgan adopted this quarter makes it difficult to compare the performance with prior periods, we believe that these operations posted their best operating performance since Q2 2011.

With JPMorgan putting most of its legal issues behind it and focusing on improving operating efficiency, the gains on the cost front are quite tangible. The corporate and investment banking division reported total non-interest expenses of $5.1 billion for Q2 2015 – well below the $6 billion it incurred last year. This more than made up for the revenue shortfall and helped the pre-tax income figure improve 7% year-on-year to reach $3.5 billion.

Retail Banking Business Powers Through Yet Another Quarter

JPMorgan’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 loan base swell to $416 billion by the end of Q2 2015 – representing 4% growth compared to the figure at the end of Q1 2015. The growing loan base along with a slight improvement in net interest margins helped interest-based revenues in Q2. The mortgage business did well to increase origination volumes to $29.3 billion – a 19% improvement compared to the $24.7 billion figure last quarter and a 74% jump year-on-year.

There was also a notable improvement in performance for the card business, with JPMorgan reporting more than $1.6 billion in total card fees for the first time since Q3 2011 this quarter. The reason can be traced to a record level of payment activity for its retail as well as commercial card units. While retail card payment volumes reached a record $125.7 billion for the quarter, merchant processing volumes were also at a record $234.1 billion.

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