JPMorgan’s Record Q1 Results Demonstrate Strength Of Its Business Model

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JPMorgan Chase (NYSE:JPM) kicked off the earnings season for banks late last week with a much stronger-than-expected performance for the first quarter. The largest U.S. bank reported strong gains across most of its operating divisions, which helped revenues soar to a record $29.1 billion for the quarter (well ahead of the consensus estimate of $28.1 billion), while earnings for the quarter also jumped to an all-time high of $2.65 compared to the consensus figure of $2.32. Notably, JPMorgan achieved these strong results despite a visibly weak performance by its trading desks. This highlights the benefits of its diversified business model, which has a dominant presence in retail banking, investment banking, commercial banking, custody banking as well as asset & wealth management services.

The bank’s strong Q1 showing reinforces our belief that its EPS figure for full-year 2019 will reach $10.00, as detailed in the Trefis valuation dashboard for JPMorgan. Taken together with a forward P/E multiple of 12 for the diversified banking giant, this points to a $120 price estimate for JPMorgan’s stock, which is roughly 10% ahead of the current share price. We detail the key factors that drove JPMorgan’s results in Q1 2019, along with the likely trend for full-year 2019 in the sections below.

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What Drove JPMorgan’s Q1 Revenues, And What’s The 2019 Outlook?

Net Interest Income: The single biggest driver of JPMorgan’s top line in Q1 2019 was its net interest income, which swelled from $13.3 billion in Q1 2018 to almost $14.5 billion in Q1 2019. These gains can be attributed to:

  • An increase in average interest-earning assets from $2.2 trillion in Q1 2018 to over $2.31 trillion in Q1 2019. This includes a strong 4% jump in average loan balances from below $927 billion a year ago to over $968 billion now.
  • A steady increase in the net interest margin (NIM) from 2.48% in Q1 2018 to over 2.56% in Q1 2019 thanks to the Fed’s four rate hikes in 2018, even as JPMorgan’s focus on credit card lending (which attract the highest interest rates among all loan categories) helped boost interest revenues.

With the Fed expected to hold interest rates steady over the year, JPMorgan’s NIM figure for full-year 2018 should largely remain around the levels seen in Q1 2019. However, its interest-earning assets should continue to witness strong growth over the year, and should average more than $2.35 trillion in size for full-year 2019. This should help JPMorgan report a net interest income of well over $58 billion for full-year 2019, as detailed below.

Investment Banking Revenues: JPMorgan’s investment banking revenues include its fees from M&A advisory activities as well as its equity underwriting and debt origination fees. The total investment banking fees for Q1 2019 increased to $1.84 billion from just under $1.7 billion a year ago. While the bank benefited from a sizable improvement in activity in the global M&A as well as debt capital markets for the quarter, there was a notable decline in equity underwriting activity. With several big ticket IPOs expected over the coming months, total investment banking revenues should witness strong growth for the year. We forecast these revenues to cross a record $7.5 billion for full-year 2019 – up from $7.2 billion in 2018.

Securities Trading Revenues: The weakest aspect of JPMorgan’s Q1 results was the fact that its securities trading revenues fell 17% year-on-year from $6.6 billion in Q1 2018 to $5.5 billion in Q1 2019. This includes an 18% reduction in fixed income trading revenues (from $4.55 billion to $3.7 billion), and a 14% decline in equity trading revenues from $2 billion to $1.4 billion. As the first quarter is seasonally the strongest period for securities trading, this will have a tangible impact on revenues for full-year 2019. However, it should be noted that Q4 2018 was the worst quarter in terms of securities trading revenues for the largest U.S. banks in four years. While JPMorgan is unlikely to repeat its extremely strong trading performance for the first half of 2018 over the first half of 2019, we expect it to fare much better in the latter half of the year. This should help securities trading revenues for full-year 2019 remain largely level with the figure for full-year 2018.

What Drove JPMorgan’s Expenses In Q1, And What’s The 2019 Outlook?

Compensation Expenses: JPMorgan’s record revenues for the quarter were accompanied by all-time high compensation expenses of $8.94 billion. This is largely expected, especially since the first quarter of the year has seasonally elevated compensation costs (due to bonus payouts to employees). Notably, though, JPMorgan’s compensation expenses have grown only 1% year-on-year – well below the 4% growth in its revenues over the same period. With the bank looking to reduce headcount in its asset & wealth management division, the total compensation expenses for the year should only be slightly ahead of the figure for full-year 2018.

Loan Provisions: JPMorgan’s loan provisions for Q1 2019 nudged lower to $1.5 billion from $1.55 billion in the previous quarter, although the figure swelled 28% when compared to the $1.17 billion figure a year ago. The year-on-year jump can be explained by the fact that the bank had to incur higher provisions in its commercial banking segment this time around, while the segment benefited from a sizable one-time release of provisions last year. That said, there was a small increase in charge-off rates for several loan categories – especially card loans. This should result in provisions remaining elevated over the rest of the year compared to the figures for 2018. Accordingly, we expect loan provisions for full-year 2019 to increase to $5.2 billion from $4.9 billion in 2018.

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