JPMorgan’s Record Q1 Performance Demonstrates Its Growth Potential

by Trefis Team
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JPMorgan Chase (NYSE:JPM) comfortably beat the already high investor expectations for its first quarter results late last week – as the diversified banking giant made the most of increased volatility across global capital markets to report extremely strong trading revenues for the period. Taken together with an improving interest rate environment in the U.S., and the impact of tax reform on corporate profits, JPMorgan reported a record net income figure of $8.2 billion for the quarter. This compares to an average figure of $5.5 billion for the bank over the last four years.

We have summarized JPMorgan’s Q1 2018 earnings and also detailed the major takeaways from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below. Notably, JPMorgan’s dominant position across financial services including retail banking, investment banking, commercial banking as well as custody banking puts it in an enviable position in the industry – especially given the strong positive outlook for all these services. We have increased our price estimate for JPMorgan’s stock upwards from $115 to $118 to factor in the better-than-expected operating margins for its retail as well as investment banking operations in Q1.

See our full analysis of JPMorgan

Improving Net Interest Margins (NIM) Remain A Critical Profit Driver

The rate hikes implemented by the Fed have helped the interest rate environment in the country recover steadily from the record low levels seen over 2014-15. The ongoing rate hike process has helped JPMorgan’s NIM figure climb from 2.22% in Q4 2016 to 2.48% in Q1 2018 – helping quarterly net interest income cross $13.3 billion for the latest quarter. Notably, this is the second-highest net interest income figure for the bank since the record $13.7 billion it reported in Q1 2010.

Securities Trading Revenues Jump Higher As Volatility Returns To Capital Markets

Volatility across capital markets globally increased over February and March this year after remaining at all-time lows over the second half of 2017 and early 2018. As increased volatility boosted the demand for securities trading services for a quarter where activity is already seasonally elevated, this helped JPMorgan’s FICC (fixed income, currency and commodities) revenues increase to $4.5 billion for the quarter – the highest in five years. Additionally, the bank’s equity trading revenues crossed $2 billion for the first time ever.

However, as we pointed out in a series of recent articles, there was a notable reduction in activity levels across the global debt and equity capital markets over Q1 2018 compared to Q1 2017. This year-on-year decline in deal volumes had a visible impact on JPMorgan’s debt origination as well as equity underwriting fees – partially mitigated by an increase in M&A advisory fees.

Effective Tax Rate Falls To Just 18% Thanks To The Tax Act

JPMorgan reported an effective tax rate figure of 18.3% for Q1 2018 – well below the average of 29% over the last five years. It should be noted that the figure for Q4 2017 was elevated due to one-time charges from the implementation of the U.S. Tax Act. Going forward, we expect the figure to largely remain in the 18-20% range.

Based on JPMorgan’s strong Q1 2018 results, we now expect the bank to report EPS of $9.22 for full-year 2018. Taken together with a P/E ratio of 12.8 (which we believe is appropriate for the banking giant), this works out to a price estimate of $118 for JPMorgan’s shares, which is slightly ahead of the current market price.

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