Upbeat Consumer Banking Performance Helps JPMorgan Overcome Investment Banking Weakness In Q3

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JPMorgan Chase (NYSE:JPM) posted a stronger-than-expected performance for the third quarter late last week, as optimism surrounding the U.S. economy had a positive impact on several parts of the bank’s diversified business model. The largest U.S. bank gained the most from the improving interest rate environment, even as an increase in payment activity boosted card income. This more than made up for the lukewarm investment banking performance for the period and also mitigated the impact of continued weakness in the mortgage industry on the top line.

We have summarized JPMorgan’s Q3 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 $120 to $122 in view of the stronger-than-expected Q3 performance.

See our full analysis of JPMorgan

Net Interest Income Increases To Highest Level In JPMorgan’s History

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 2014-2015. The ongoing rate hike process helped JPMorgan’s NIM figure climb from 2.22% in Q4 2016 to 2.48% in Q1 2018, before a flattening yield curve drove the figure lower to 2.46% in Q2. With the yield curve correcting itself over the last few months, JPMorgan’s NIM figure recovered to 2.51% in Q3 2018 – the highest level it has been at since early 2012.  Taken together with continued growth in the banking giant’s loan base, this translated into a record net interest income figure of $13.9 billion.

Upbeat Payment Activity Boosts Card Income

JPMorgan’s card income increased to over $1.3 billion for the first time since Q2 2016 thanks to a notable increase in customer spending, which boosted card sales volumes as well as merchant processing volume. JPMorgan’s credit and debit card volumes reached a new all-time high of $259 billion, while brisk growth in the volume of payments processed by JPMorgan’s merchant payment services helped these payment volumes swell to nearly $344 billion.

 

Investment Banking Revenues Soar From Upbeat Equity Market Showing

The third quarter of the year is seasonally a slower period for investment banking activities compared to the first two quarters. While this would have weighed on securities trading revenues for the period, there was also a considerable reduction in capital market volatility over Q3. Taken together, these two factors resulted in a sharp sequential reduction in total securities trading revenues for JPMorgan. The third quarter also saw a notable reduction in M&A as well as equity capital market activity, which weighed on advisory & underwriting fees for the period.

As shown in the chart below, JPMorgan’s total investment banking revenues were $6.26 billion in Q3 2018 – roughly 6% lower than the $6.68-billion figure a year ago. More importantly, this represents a 17% sequential decline in these revenues.

 

Based on JPMorgan’s Q3 2018 results, we now expect the bank to report EPS of $9.28 for full-year 2018. Taken together with our estimated P/E ratio of 13, this works out to a price estimate of $122 for JPMorgan’s shares, which is about 10% ahead of the current market price.

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