How Important Is The Loans-And-Deposits Banking Business To JPMorgan’s Stock?

JPMorgan Chase’s (NYSE:JPM) Consumer & Community Banking business encompasses its traditional loans-and-deposits operations, and has contributed more than half of the bank’s growth over the last three years. Its importance in the banking giant’s business model is expected to increase more over 2019-2020 as it is set to provide $6.6 billion out of the $10.5 billion in total revenues for the bank, which is 63% of expected growth. This division serves small businesses and consumers by providing traditional banking services to them through their various branch locations, ATM’s, online banking, etc., and is the highest contributing segment of the bank with an average revenue share of around 47% over the last three years. In 2019, we expect it to contribute $55 billion to JPMorgan’s revenues, making up 48% of the $114.7 billion in Total Revenues for the year. Trefis details the key components of JPMorgan’s Revenues in an interactive dashboard, along with our forecast for 2019-2020.

Notably, Corporate & Investment Banking is the second-highest contributing business of JPMorgan with expected revenues of $36 billion in 2019, which translates into a revenue share of 32%. This segment provides Investment Banking (financial advisory and underwriting), Sales & Trading, and Treasury & Security Services. You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for JPMorgan’s Revenues.

What To Expect From JPMorgan’s Revenues?

• JPMorgan revenues have grown at an average annual rate of 7% – from $95.7 billion in 2016 to $109 billion in 2018.
• However, we expect the growth rate to reduce to 4.7% over 2019-2020.
• The bank would add about $10.5 billion over 2019-2020, which would be driven by gains of about $6.6 billion from Consumer & Community Banking, $685 million from Asset & Wealth Management, $530 million from Commercial Banking and a reduction in losses for the Corporate / Private Equity division by $2.8 billion, partially offset by a slight drop in Corporate & Investment Banking.
• Overall, total revenues are expected to cross $119.5 billion by 2020.

Details about how trends in JPMorgan revenues compare with peers Citigroup, Bank of America and Wells Fargo are available in our interactive dashboard.

(A) Consumer & Community Banking is expected to add $6.6 billion to the total revenues over 2019-2020

• The Retail Banking division of JPMorgan serves small businesses and consumers by providing traditional banking services to them through their various branch locations, ATM’s, online banking etc.
• This segment has contributed more than 46% of total revenues over the last three years. It has grown 16% from $44.9 billion in 2016 to $52.1 billion in 2018, mainly due to a 21% increase in net interest income from consumer loans.
• This rise in net interest income was due to improvement in the segment’s net interest margin from 6.49% in 2016 to 7.49% in 2018. Further, we expect the net interest income to grow 11% and cross $37.8 billion by 2020.
• Although the card income has seen little growth over the last 2 years, it is expected to jump 73% and cross $7.9 billion by 2020 driven by expected growth in total card volume.
• Mortgage production income has reported negative growth over the last 2 years, which translated into a drop of 69% in segment revenues equivalent to $585 million. Out of this, the unit suffered a decline of $368 million in 2018 driven by 19% y-o-y fall in mortgage production volume coupled with 31 bps drop in production income as % of total mortgage origination volume.
• In the near term, we expect mortgage production income to grow 48% and touch $0.4 billion by 2020, mainly due to higher production income as % of total mortgage origination volume.
• Mortgage servicing income decreased 40% y-o-y in 2017 due to negative growth in third-party mortgage servicing portfolio and lower servicing income as % of the servicing portfolio. Thereafter, it remained at the same level in 2018 and is expected to report marginal growth over 2019-2020.
• Service charges grew 24% from $8.4 billion in 2016 to $10.5 billion in 2018 on the back of higher average deposits. Moving forward, we expect the average deposits to maintain the current trend, enabling the service charges to grow 11% and cross $11.6 billion by 2020.
• Overall, we expect the segment to grow at an average annual rate of 6% and cross $58.7 billion by 2020.

(B) Corporate & Investment Banking revenues are expected to drop by 1% in 2019

• This segment includes Investment Banking (financial advisory and underwriting), Sales & Trading, and Treasury & Security Services (cash management, custody, trade, wholesale cards and liquidity products).
• Although the segment revenues have grown by 3% over the last three years – from $35.2 billion in 2016 to $36.4 billion in 2018, we expect it to slightly drop in 2019 due to negative market conditions and lower consumer activity.
• Thereafter, it is expected to grow at an average annual rate of 1% and cross $36.3 billion by 2020.

(C) Asset & Wealth Management have grown 17% over the last three years — from $12 billion in 2016 to $14.1 billion in 2018.

• It includes global investment management, banking, brokerage and retirement services to corporations and high net-worth individuals.
• The segment revenues are expected to cross $14.8 billion by 2020.

Our interactive dashboard for JPMorgan details what is driving changes in revenues for JPMorgan’s Corporate & Investment Banking and Asset & Wealth Management divisions.

(D) Commercial Banking would add $530 million over 2019-2020

• It provides corporate lending, treasury related, Investment Banking and asset management services.
• Commercial Banking grew 15% y-o-y in 2017, mainly driven by a 19% jump in segment’s net interest income due to growth in outstanding commercial loans.
• Although the segment is on a growth trajectory, we expect the growth rate to slow down over 2019-2020, restricting the revenues to around $9.6 billion by 2020.

(E) Corporate/Private Equity segment doesn’t have a significant impact on JPMorgan’s revenues.

• This segment includes private equity, treasury, corporate staff units, and centrally managed expenses.
• The segment revenues have shown positive growth over the last 2 years and are expected to increase from $-2.6 billion in 2018 to $0.1 billion by 2020.
• The main reason behind this trend is the positive growth in Treasury & CIO revenues which constitutes the major share of the revenue figure.

Trefis estimates JPMorgan’s stock (shows cash and valuation analysis) to have a fair value of $124, which is 10% lower than the current market price (Our price estimate takes into account JPMorgan’s earnings release for the third quarter).

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