JPMorgan (JPM) Q2 Earnings Beat Despite Higher Credit Costs

As expected, a significant improvement in trading and mortgage banking businesses drove JPMorgan’s JPM second-quarter 2020 earnings of $1.38 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.34.

The results included provision builds owing to deterioration in the macro-economic backdrop, bridge book markups and gains related to funding spread tightening on derivatives. Excluding these, earnings per share amounted to $3.27.

Shares of JPMorgan gained almost 1.5% in pre-market trading as investors reacted positively to substantial support from fee income and the bank’s strong capital position. Nonetheless, a full day’s trading session will depict a better picture.

The company built a large reserve to tide over economic slowdown. In a statement, Jamie Dimon said, “Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy.”

Further, operating expenses increased year over year in the reported quarter. Additionally, near-zero interest rates and dismal loan demand hurt interest income.

Moreover, credit card sales volume declined 23%, while merchant processing volume remained relatively unchanged from the prior-year quarter.

Conversely, historically lower rates drove mortgage fees and related income to $917 million. As expected, fixed income markets revenues jumped 99%, driven by strong performance across products. Similarly, equity markets revenues grew 38% driven by solid client activities.

Despite disappointing deal making activities during the quarter, JPMorgan was able to grow advisory fees, which were up 15% year over year. In addition to this, both equity and debt underwriting fees rose 93% and 54%, respectively. Thus, investment banking fees recorded a surge of 54% from the prior-year quarter.

Among other positives, Commercial Banking average loan balances were up 13%, and Asset & Wealth Management average loan balances grew 12% from the year-ago quarter.

Overall quarterly performance of JPMorgan’s business segments, in terms of net income generation, was disappointing. All segments, except Corporate & Investment Bank, reported a drastic decline in net income and/or net loss on a year-over-year basis.

Net income plunged 51% from the prior-year period to $4.7 billion.

Trading & Mortgage Banking Aid Revenues, Costs Rise

Net revenues as reported were $33 billion, up 15% from the year-ago quarter. The improvement reflects higher trading, mortgage and investment banking fees, while lower interest rates was an offsetting factor. Also, the top line beat the Zacks Consensus Estimate of $29.5 billion.

Net interest income declined 4% year over year to $13.9 billion. Conversely, non-interest income grew 33% from the year-ago quarter to $19.1 billion, mainly driven by mortgage banking and principal transactions performance.

Non-interest expenses (on managed basis) were $16.9 billion, up 4% from the year-ago quarter. The rise was primarily due to “higher revenue-related expense.”

Credit Quality Worsens

Provision for credit losses was $10.5 billion, up significantly from $1.1 billion in the prior-year quarter. The rise was largely due to reserve builds of $8.9 billion amid a deteriorating operating backdrop and “increased uncertainty in the macroeconomic outlook” as a result of coronavirus impacts.

As of Jun 30, 2020, non-performing assets were $8.4 billion, which jumped 60% from Jun 30, 2019. Further, net charge-offs increased 11% from the year-ago period to $1.6 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 14.3% at second quarter-end compared with 14.0% on Jun 30, 2019. Tier 1 common equity capital ratio (estimated) was 12.4%, up from 12.2% as of the same date. Total capital ratio was 16.6% (estimated) at second quarter-end compared with 15.8% as of Jun 30, 2019.

Book value per share was $76.91 as of Jun 30, 2020 compared with $73.88 in the corresponding period of 2019. Tangible book value per common share was $61.76 at the end of June, up from $59.52 in the comparable year-ago period.

Our Take

Branch expansion efforts, and solid trading as well as mortgage banking performances are likely to continue supporting JPMorgan’s revenues. However, lower interest rates, economic slowdown and coronavirus-related ambiguity are near-term concerns.

JPMorgan Chase Co. Price, Consensus and EPS Surprise

JPMorgan Chase  Co. Price, Consensus and EPS Surprise

JPMorgan Chase Co. price-consensus-eps-surprise-chart | JPMorgan Chase Co. Quote

JPMorgan currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Date of Other Major Banks

PNC Financial PNC is scheduled to come out with quarterly numbers on Jul 15, while Bank of America BAC) and Truist Financial TFC are set to report the same on Jul 16.

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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.

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