JPMorgan Earnings Preview: Expect Strong Performance Across Divisions, Mortgage Banking May Be A Laggard
Investors will be able to get an idea of how various banking services fared in the fourth quarter on Friday, January 14, 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 Q4 for each of these offerings. With rivals Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) also slated to publish Q4 and FY 2016 results on the same day, the slew of releases should provide considerable clarity about what to expect from earnings announcements of other banking giants over coming weeks.
JPMorgan is expected to gain the most in Q4 from the surge in securities trading activity over the last two months of the year following the U.S. election – something that should help the bank report handsome trading gains for the quarter. Additionally, the Fed’s decision to hike benchmark interest rates for only the second time since the economic downturn coupled with strong growth in loans for the industry should boost JPMorgan’s top line. Profits for the retail banking business are also expected to benefit from a reduction in loan charge-off rates across loan categories. The only division we believe will report a sub-par performance for the quarter is the bank’s mortgage banking unit, as continued headwinds in the mortgage industry are likely to weigh on revenues.
See our complete analysis of JPMorgan Chase here
Investment Banking Division To Get A Leg Up From Strong Trading Performance
There was a marked increase in equity trading activity over the last two months of the quarter following the election. While elevated trading volumes for the period should have helped trading commissions, the equity trading desk should have also benefited from the rally in share price across sectors, as this will result in sizable mark-to-market gains on the equity trading portfolio.
At the same time, improved interest rate expectations along with the Fed’s rate hike in December also helped debt trading activity remain high for a third consecutive quarter. JPMorgan CEO Jamie Dimon mentioned at a recent conference that its FICC (fixed income, currencies and commodities) trading unit should see a 15% increase in revenues year-on-year. [1] Notably, this expectation was before the Fed announced its rate hike. As debt trading volumes jumped further after the hike, we expect the actual FICC trading revenues for Q4 2016 to be about 25-30% higher than the $2.6 billion figure for Q4 2015. This points to a figure in the range of $3.2-3.3 billion for the quarter. Taken together with an estimated $1.5 billion in equity trading revenues, we expect JPMorgan’s securities trading revenues to be over $4.7 billion – a strong showing given the fact that the seasonal industry is slowest during the fourth quarter of a year.
However, trading gains are expected to be mitigated to an extent by a lukewarm performance by JPMorgan’s advisory and underwriting operations. Based on data compiled by Thomson Reuters about global M&A, equity underwriting and debt origination volumes as well as the corresponding fee estimates, JPMorgan’s debt origination fees are expected to shrink considerably 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. While M&A advisory fees are also expected to shrink slightly, the bank’s equity underwriting fees are expected to nudge higher year-on-year. The overall impact will be a notable reduction in total advisory & underwriting fees compared to Q4 2015. We estimate these revenues to fall from roughly $1.5 billion in Q4 2015 to around $1.3 billion for Q4 2016.
The Retail Banking Business Had A Lot Working In Its Favor
JPMorgan’s consumer and business division, which includes banking services offered to retail customers (credit cards, mortgages and deposits) as well as small businesses, is likely to report a strong performance for the quarter on the back of brisk growth in its loan portfolio. While there was an overall improvement in loans across the U.S. banking industry, we expect JPMorgan to have also benefited from Wells Fargo’s ongoing woes from its account opening scandal. With one of the most extensive branch network in the U.S., JPMorgan would have attracted many existing (and potential) customers that decided against loans and deposit products from Wells Fargo. Moreover, the last quarter of a year sees the highest amount of card activity due to the holiday season. All these factors together point to strong growth in fee revenues for JPMorgan q-on-q.
The Federal Reserve’s decision to hike benchmark rates by 25 basis points in early December should have helped JPMorgan’s net interest margin (NIM) figure. It must be remembered here that JPMorgan has more than $2.1 trillion in interest-earnings assets, so even a single basis point (0.01% point) increase in the NIM figure translates into an increase in quarterly revenues by ~$50 million. We believe that JPMorgan’s NIM figure should have increased roughly 5 basis points from 2.26% in Q3 2016 to at least 2.31% for Q4 2016. This should increase JPMorgan’s revenues by $250 million q-on-q – all of which will directly accrue to the bottom line.
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- J.P. Morgan, Bank of America Trading Activity Continues Strong After Election, The Wall Street Journal, Dec 6 2016 [↩]