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JPMorgan Chase (JPM Free JPMorgan Stock Report), the largest bank in the United States and a component of the Dow 30, has reported September-period earnings at the high end of consensus expectations. The stock fell initially on the earnings report (perhaps reflecting disappointing results in the markets businesses), but had regained the lost ground by mid-morning, amid a strong market rebound.

The company earned $2.34 a share in the third quarter, compared with $1.76 in the year-earlier period and our estimate of $2.20.

Looking at the company as a whole, net interest income rose 7%, driven by higher interest rates and healthy loan and deposit growth. Noninterest revenues increased only 3%, with markdowns on certain private equity investments offsetting some of the growth in auto lease and debt market-related revenues. Expenses grew a little faster than revenues, reflecting investments that JPMorgan are making in its businesses, higher compensation, and auto lease depreciation. Credit costs remained low and the company released some of its reserves for consumer loan losses. As in the first half, results benefited from the reduction in the corporate tax rate (due to passage of the Tax Cuts and Jobs Act in late 2017) and a lower share count (reflecting repurchases of 4.2 billion of common stock in the period).

By business lines, JPMorgan's Consumer & Community Banking segment generated nearly half of the company's net income. Not surprisingly, Home Lending revenues declined 16%, driven by lower mortgage servicing revenues and margin compression. But the rest of the segment benefited from wider deposit margins, strong card and auto lease volume, and lower card-acquisition costs. The company released $250 million of mortgage loan loss reserves, but added $150 million to its reserves for credit card losses.

The Corporate & Investment Bank segment, the next largest contributor to results (about 30% of the total), registered a slight increase in net income, compared to the year-earlier period, but results fell short of net income in the March and June quarters of this year, mostly owing to lower debt and equity markets revenues. On a year-to-year basis, growth in equity markets and investment banking revenues offset the decline in the fixed income area. Expenses, up 8%, outpaced revenue growth, reflecting investments in technology and new hires.

Meanwhile, Commercial Banking results increased nicely, despite some migration of deposits to higher-yielding investments. Deposit margins expanded and recoveries of previously charged-off loans offset credit losses. And Asset & Wealth Management profits rose 7%, aided by a similar increase in assets under management.

Looking ahead, the company, like all banks, isn't immune from economic trends. And pressure to raise deposit costs probably will increase in the year ahead. But the company appears optimistic concerning prospects for business activity in the United States and loan growth. JPMorgan has strong market shares in the credit card and investment banking arenas. Expenses probably will remain high in the new year, owing to the ongoing heavy spending for technology, new branches (in new markets, like Philadelphia), and bankers. But revenues should benefit from the heavy investment. In all, we have raised our share-net estimate for 2018 by $0.15, to $9.20, and our 2019 call by a dime, to $9.60.

We continue to like the JPMorgan story. And the good dividend yield may appeal to income-oriented investors. But with the stock trading around the low end of its 3- to 5-year Target Price Range, total return potential to 2021-2023 isn't exceptional.


About The Company:JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. As of 12/31/17, the company had 5,130 branches. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.