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JPMorgan Chase Third-Quarter Earnings Preview: 4 Things to Watch

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The good news for JPMorgan Chase in particular is that it generates more than half of its net revenue from noninterest income. The biggest contributors to this are its asset management, trading, and investment banking businesses, which accounted for $7.8 billion, $6.5 billion, and $3.6 billion in revenue for the first six months of the year, respectively.

Investors will accordingly want to watch not only JPMorgan's top-line revenue figure, but also the performance of each of these components relative to the same period last year, as well as the second quarter of this year.

Metric 3Q14 2Q15
Total revenue (net of interest expense) $24.47 billion $23.81 billion
Asset management revenue $3.98 billion $4.02 billion
Trading revenue $2.97 billion $2.83 billion
Investment banking fees $1.54 billion $1.83 billion

Source: JPMorgan Chase's 2Q15 financial supplement .

2. Loan loss provisions

One of the last things bank investors need to worry about right now is credit quality. The industry in general has gained a renewed appreciation for risk management, as many banks continue to lick their wounds from the financial crisis. As JPMorgan Chase Chairman and CEO Jamie Dimon explained at the Barclays Global Financial Services conference last month:

If you look at the credit that's been written out in mortgage, it's pristine. Small business, it's good. I mean, you obviously have a cycle. Your small-business laws are good. Middle-market, I think, it's very good. And I think the standards there, it seems to us, are better than what people have been doing years ago. And large corporate, you all know as well as I do, is still pretty good.

There is nevertheless one particular area that investors will want to take note of: loans to the energy sector. Dramatically lower energy prices could spell trouble for these oil and gas companies that don't have the resources to stay afloat until prices recover. In JPMorgan's case, Dimon estimates that it would have to add only $500 million to loan loss reserves even if oil fell to $30 a barrel and stayed there for an "extended period of time."

3. Noninterest expenses

The corollary to the industry's revenue problems is the need for banks to trim expenses. But while this has been an obsession over the last few years at the likes of Bank of America and Citigroup, it isn't typically an issue for JPMorgan Chase, which is known for operating efficiently. Despite this, investors will want to keep an eye on the direction of noninterest (i.e., operating) expenses and JPMorgan's efficiency ratio , which expresses operating expenses as a percent of net revenue. In both cases, lower is better.

Metric 3Q14 2Q15
Noninterest expenses $15.8 billion $14.5 billion
Efficiency ratio 64.5% 60.9%

Source: JPMorgan Chase's 2Q15 financial supplement .

4. Profitability

Last but not least is profitability, or return on assets and equity. These two figures are the single most important variables that dictate a bank's valuation. The more a bank earns relative to its shareholders equity, the higher its valuation, and vice versa. When it comes to banks, in turn, the objective is to generate net income equal to at least 1% of assets and 10% of equity, on an annualized basis.

Metric 3Q14 2Q15
Return on assets 0.90% 1.01%
Return on tangible common equity 13% 14%

Source: JPMorgan Chase's 2Q15 financial supplement .

As you can see in the table above, neither of these benchmarks were a problem for JPMorgan Chase in the second quarter, through which it generated a 14% return on tangible common equity and a 1.01% return on assets. And while there's little reason to think that the $2.5 trillion bank's profitability will fall precipitously in the third quarter, it's still good for shareholders to keep themselves abreast of these important measures.

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The article JPMorgan Chase Third-Quarter Earnings Preview: 4 Things to Watch originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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