Mortgage Banking Growth, Cost Improvements Highlight JPMorgan’s Lukewarm Q3 Results
JPMorgan Chase (NYSE:JPM) failed to meet investor expectations with its third quarter results on Tuesday, October 13, as the country’s largest bank witnessed a notable reduction in revenues for each of its core operating divisions year-on-year as well as quarter-on-quarter. [1] The sub-par operating performance was dragged down further by firm-wide legal expenses in excess of $1.3 billion – a figure which was elevated by the bank’s $595 million settlement of its credit default swap (CDS) litigation. [2] The bottom line was rescued by a one-time tax gain of $2.2 billion.
While JPMorgan’s lukewarm Q3 performance points to a weak quarter for the banking industry as a whole, several positive trends can be discerned from the results. The most important among these is the reduction in total non-interest expenses (adjusted for one-time events) for yet another quarter. JPMorgan’s adjusted costs for Q3 2015 were $14 billion – down from $14.2 billion in Q2 2015 and around $14.5 billion a year ago. Also, the bank’s net interest margin unexpectedly rose for a second consecutive quarter to 2.16%. Finally, the mortgage and card businesses may have fallen short on revenues, but they reported a sizable improvement in their level of activity – something that will be key to profits over subsequent quarters.
We maintain a $71 price estimate for JPMorgan’s shares, which is about 15% ahead of the current market price.
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Debt Trading Weighs On Investment Banking Business
JPMorgan reported total revenues of $8.2 billion for its corporate and investment banking division, which includes its advisory, underwriting, trading, treasury and securities services operations. This compares to a figure of $8.7 billion for Q2 2015 and a substantially higher $9.1 billion for Q3 2014. The year-on-year reduction is almost completely accounted for by a reduction in fixed income trading revenues. JPMorgan reported FICC (fixed income, currency and commodities) trading revenues of $2.9 billion for Q3 2015 – a good 23% lower than the $3.8 billion figure a year ago. This is worse than the expected decline of 5-10% year-on-year. The impact of this on the top line was mitigated to an extent by the equities trading desk, however, which generated just over $1.4 billion in revenues this time around in comparison to less than $1.3 billion in Q3 2014.
While revenues for JPMorgan’s advisory and underwriting operations fell more than 12% sequentially due to a marked reduction in debt as well as equity underwriting revenues, there was actually a 5% improvement year-on-year. Equity underwriting fees suffered the most in Q3, as they fell to below $300 million for the first time since Q1 2013. The strong level of global M&A activity this year helped advisory fees cross the $500 million mark for just the third time in the last five years.
Reduced Loan Provisions Boost Retail Banking Results Despite Revenue Pressure
JPMorgan’s consumer and community banking division, which includes banking services offered to retail customers as well as small businesses, saw the size of total deposits and total loans swell to $539 billion and $430 billion, respectively, by the end of Q3 2015 – a sequential growth of 2-3%. This helped fee income from these services reach the highest level in the last two years, and mitigated the impact of a sizable reduction in revenues from mortgage as well as card operations on total revenues to an extent.
Notably, the mortgage business saw an increase in origination volumes to $29.9 billion – a 41% improvement compared to the $21.2 billion figure a year ago – as a result of JPMorgan’s increasing focus on the correspondent channel. Also, the volume of outstanding mortgage loans swelled 6% from $203 billion in Q2 2015 to $214 billion now. The total revenues for the quarter do not reflect these improvements due to accounting losses from the revaluation of mortgage servicing rights (MSRs). Moreover, the mortgage division gained from a release of loan reserves worth $534 million in Q3 – something that had a positive impact on total loan provisions for the banking giant. You can see how mortgage loan provisions affect JPMorgan’s share price by making changes to the chart below.
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- 3Q15 Earnings Press Release, JPMorgan Earnings Release, Oct 13 2015 [↩]
- JPMorgan Said to Pay Most in $1.86 Billion CDS Settlement, Bloomberg, Oct 1 2015 [↩]