JPMorgan Chase & Co.
) is scheduled to release its second-quarter 2014 results tomorrow,
Jul 15, before the opening bell. Pessimism over the banking giant's
earnings performance is quite obvious this time around with the
prevailing tough industry backdrop, seasonality and clear
indication of a significant decline in capital market revenues.
Wells Fargo & Co.
) being the first bank to report, for a change, the weakness in the
broader industry is confirmed beforehand. This further lessens too
much expectation from JPMorgan, as it has endured the same industry
challenges. A few catalysts, on the other hand, might offset the
negatives to some extent.
In the first quarter, JPMorgan failed to override the tough banking
backdrop and delivered a negative earnings surprise of 9.2%.
Earnings per share came in at $1.28, missing the Zacks Consensus
Estimate of $1.41. While its cost containment efforts were
reflected in the non-interest expenses, pressure on top line and a
higher-than-expected provision dominated.
Will JPMorgan fail to prove its underlying strength this time too?
Let's see what factors might have sketched the Q2 earnings report.
How Things Have Shaped Up?
The first thing to keep in mind is JPMorgan's disclosure about the
expected decline in capital market revenues of as much as 20% year
over year. This guidance stemmed from the expected negative impact
of the continued downtrend in fixed income, currency and
commodities trading on the sizable capital market operations of the
JPMorgan to Witness 20% Drop in Q2 Market Revs
In addition to the soft trading volumes, dreary client activities,
high legal costs and slowdown in reserve release should dominate
the bank's Q2 results. Sluggishness in mortgage banking activities
should also be reflected in the top line. But investment banking
should bring some breather thanks to heightened M&A activities
and IPOs during the quarter.
The company has heavily focused on streamlining its operations.
Dumping unprofitable businesses and concentrating on those with
strong potential should be of some help.
Another defensive action - workforce reduction - has been the
bank's key instrument for some time to stay afloat. The company has
plans to lay off 8,000 workers (about 3% of its total workforce) in
its consumer and mortgage banking segments by the end of this year.
Also, JPMorgan is seeking avenues to slash wasteful expenditure.
But no major action was taken on that front during the second
quarter, so a significant reflection is not expected in the
While we expect expenses to have remained under control for the
quarter, this might not be enough to make up for the shortfall that
the company is expected to witness on the top line. In addition to
the new set of challenges, a dearth of significant loan growth and
pressure on net interest margins from the prolonged low rate
environment were there to hurt the top line.
Most importantly, this banking giant failed to impress analysts
with its level of activities during the quarter. The weakness
surrounding the industry and the company's highly sensitive
financials forced many analysts to significantly lower their
earnings estimates. The Zacks Consensus Estimate has moved down by
0.8% to $1.30 per share over the last 7 days, as the tendency for a
downward estimate revision was more obvious.
Our proven model does not conclusively show that JPMorgan is likely
to beat the Zacks Consensus Estimate in the second quarter. That is
because a stock needs to have both a positive
and a Zacks Rank #3 (Hold) or better for this to happen.
Unfortunately, this is not the case here as elaborated below.
The Earnings ESP for JPMorgan is -1.54%. This is because the
Most Accurate estimate stands at $1.28 while the Zacks Consensus
Estimate is higher at $1.30.
JPMorgan's Zacks Rank #3 increases the predictive power of ESP. But
we also need to have a positive ESP to be confident of an earnings
Stocks That Warrant a Look
Here are a few bank stocks that you may want to consider, as our
model shows that these have the right combination of elements to
post an earnings beat this quarter.
Fifth Third Bancorp
) has an Earnings ESP of +4.44% and carries a Zacks Rank #3. It is
scheduled to report results on Jul 17.
The PNC Financial Services Group, Inc.
) has an Earnings ESP of +0.57% and carries a Zacks Rank #3. It is
scheduled to report results on Jul 16.
The Earnings ESP for
Commerce Bancshares, Inc.
) is +1.47% and it carries a Zacks Rank #2 (Buy). The company is
expected to release results on Jul 15.
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