JPMorgan Chase & Co. (JPM – Free JPMorgan Stock Report), a global financial services provider and a component of the Dow 30, has reported June-quarter results that beat investors' expectations. The stock, which had been trading near a multiyear high recently, initially rose slightly on the news.
The company earned $1.60 a share in the June interim, well above both our share-net estimate of $1.25 and the $1.21 that it logged in the year-earlier period. The strong performance was aided by a 19% increase in the Corporate & Investment Bank's profits, reductions in mortgage and credit card reserves (which boosted results by $0.24 a share), and accounting items, all partly offset by additions to litigation reserves (which clipped $0.09 from earnings per share).
The Consumer & Community Banking division turned in a mixed performance, with revenues and profits down 3% and 6%, respectively, year to year. Average loans declined 4% and deposit margins contracted, pressuring net interest income. Fee-based revenues also declined, mostly due to lower mortgage production and servicing revenues. But card and asset management revenues rose, and the aforementioned reserve reductions mitigated some of the top-line pressures. Management figures a 100 basis point rise in the 10-year Treasury bill rate could add $900 million to net interest income over time and expects net interest income in the September quarter to strengthen. But, higher interest rates probably will hurt mortgage refinance volumes in the second half. And while mortgage credit costs may well moderate further, mortgage expenses might not fall as fast as mortgage revenues.
Meanwhile, the good performance in the Corporate & Investment Bank was supported by strength in debt and equity underwriting revenues and an 18% rise in markets income. JPMorgan has strong positions in a number of investment banking businesses, but market conditions, which are volatile, will continue to have a big influence on results in this division.
With regard to the three smaller divisions, Commercial Banking profits slipped 8%, as expenses increased faster than revenues. The company looks for a better performance in the second half of the year, however. Asset Management profits, on the other hand, rose 28%, reflecting strong growth in assets under management. Additionally, the loss in the Corporate/Private Equity division moderated.
In light of the much better-than-anticipated June-period results, we are increasing our share-net estimate for full-year 2013, from $5.65 a share to $5.90, and our 2014 estimate moves from $5.90 a share to $6.00. We also now expect earnings to top $7.00 a share by the 2016-2018 time frame.
In conjunction with the earnings report, JPMorgan also indicated that it expects to comply with a proposed new holding company leverage ratio guideline by the first quarter of 2015, and with a bank leverage ratio sometime thereafter. The new guidelines are part of an effort by bank regulators to curb big banks' risky activities so as to avoid using taxpayer funds for future, potential bailouts, as in 2008. Complying with the new rules will have some impact on operations, and possibly dividends and share repurchases, though it's hard to determine how great until the new rules are finalized. The company recently increased the dividend on its common stock from a quarterly rate of $0.30 a share, to $0.38. Though the dividend has been restored to pre-2009 levels, we assume growth will slow down over the next few years. Nonetheless, the stock has decent total return potential over the pull to 2016-2018. However, it may not be suitable for very conservative investors because investment banking income is somewhat volatile, as well as the probable negative impact of greater regulatory scrutiny on the revenue and earnings growth of big banks, like JPMorgan Chase.
About The Company: JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. 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.