JPMorgan Earnings Preview: Mortgage, Card Businesses Should Offset Lukewarm Trading Results
Investors will be able to get an idea of how various banking services fared in the third quarter on Tuesday, October 13, when JPMorgan Chase (NYSE:JPM) kicks off the earnings season for U.S. banks. As the bank is one of the largest players in global retail banking, commercial banking, investment banking, custody banking and asset management, investors should be able to gauge the trends from Q3 for each of these offerings.
While the Fed’s decision to stick to its low benchmark interest rates will weigh on JPMorgan’s top line yet again, the sharp reduction in equity market valuations around the globe is also likely to drag down total trading revenues this time around. The impact of these two factors on Q3 profits will be mitigated to an extent by improving conditions in the mortgage industry and by an expected increase in card fees from higher payment activity. At the same time, it should be noted that JPMorgan’s strong performance in Q2 was in part due to a significant reduction in non-interest expenses, and it will be interesting to see if the banking giant was successful in keeping costs at comparable levels for the most recent quarter.
We maintain a $71 price estimate for JPMorgan’s stock, which is roughly 15% ahead of its current market price.
See our complete analysis of JPMorgan Chase here
Investment Banking Arm Likely To Report A Lukewarm Quarter
The slump in global equity markets from weak economic indicators – especially in China – is expected to have a notable negative impact on JPMorgan’s trading revenues for the quarter. With CEO Jamie Dimon mentioning in a recent conference that the performance of its trading units in Q3 was similar to those of its rivals, this would indicate a 5-6% reduction in total trading revenues year-on-year. [1] The bank’s total trading revenues for Q3 2014 were slightly above $5 billion – implying a figure around $4.75 billion this time around. This would represent an improvement compared to Q2 2015, when the bank reported trading revenues of just over $4.5 billion.
JPMorgan’s advisory and underwriting operations are likely to fare worse than the trading operations when compared to Q3 2014 due to the sharp decline in debt trading activity. As we pointed out in a recent article, JPMorgan’s debt origination fees are expected to shrink by almost 22% year-on-year. As these fees make up a bulk of the bank’s advisory and underwriting revenues, the impact of this on total revenues will be noticeable. Also, equity underwriting fees are likely to shrink by nearly 40% from the figure for Q3 2014. The only saving grace comes in the form of improved M&A advisory fees, which should be about 15% higher than a year ago. Taken together, we estimate a total reduction of around 15% in JPMorgan’s advisory and underwriting fee revenues compared to Q3 2014. As the figure last year was a relatively sub-par $1.5 billion, this points to revenues of less than $1.3 billion for Q3 2015.
Retail Banking Business Should Drive Profits This Time Around
JPMorgan’s consumer and business division, which includes banking services offered to retail customers (credit cards, mortgages and deposits) as well as small businesses, will play a crucial role in ensuring that the bank’s Q3 profits are not too far removed from the prior year figure. As the Federal Reserve has yet to hike benchmark rates, it is unlikely that JPMorgan will report a net interest margin (NIM) figure higher than the 2.09% level seen in the previous quarter. This, in turn, means that the total interest income figure should remain largely unchanged compared to Q2 2015, and will likely be lower than in Q3 2014.
However, we expect good news on some other fronts, including the mortgage and card businesses. After witnessing a steady decline over several quarters, the mortgage industry showed signs of recovery this year – as evidenced by an increase in mortgage origination volumes for JPMorgan in Q1 and Q2. We expect the trend to continue in Q3, which would give the bank’s fee income from mortgage production a boost.
Also, card usage volumes generally witness an increase in Q3 compared to Q2, which should boost total card fees quarter-on-quarter. Notably, card fees exceeded $1.6 billion for the first time in four years last quarter thanks to a record level of payment activity for JPMorgan’s retail and commercial card units. The expected increase in activity levels for Q3 2015 could raise this figure to above $1.65 billion.
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- JPMorgan third quarter trading revenue down like other firms, CEO says, Reuters, Sep 18 2015 [↩]