Proving pessimists wrong, JPMorgan Chase & Company ( JPM ) braved the tough industry backdrop and seasonal softness with its underlying strength and delivered a positive earnings surprise of 22.3% in the second quarter. The banking giant came out with earnings of $1.59 per share, beating the Zacks Consensus Estimate of $1.30. The number is also marginally less than $1.60 earned in the year- ago quarter.
Results exclude an after-tax legal expense of 13 cents per share. Considering this one-time item, the company has earned $1.46 per share.
In addition to seasonally soft trading volumes, there were legal costs and lower reserve release to drag the results, but top-line strength dominated. Also, its cost containment efforts were reflected in the non-interest expenses.
Shares of JPMorgan gained 3.0% in the pre-trading session, indicating that the market is encouraged with the unexpected earnings beat. The price reaction during the trading session will give a better sense about the extent of cheer among investors.
All business segments but for Consumer & Community Banking and Corporate and Investment Bank, witnessed year-over-year improvement in net income.
Most noticeably, consumer and corporate deposits, card sales volume, client investment assets, and business banking loan originations showed year-over-year improvement. Though Corporate & Investment Bank earned 31% less than the prior-year quarter, it maintained its #1 rank in Global Investment Banking fees. It also ranked #1 in global debt, equity and syndicated loans.
Quarter in Detail
Managed net revenue of $25.3 billion in the quarter was down 2% from the year-ago quarter. However, it compared favorably with the Zacks Consensus Estimate of $23.7 billion.
Managed non-interest revenues were down 5% from the year-ago quarter at $14.3 billion. However, net interest income increased 2% to $11.0 billion, primarily reflecting the impact of higher investment securities yields, lower long-term debt and deposit yields, and higher loan balances.
Non-interest expense was $15.4 billion, down 3% from the year-ago quarter. Lower performance-based compensation in Corporate & Investment Bank and a decrease in mortgage production and servicing expenses primarily drove this improvement. Legal expense declined 1% to $669 million.
The provision for credit losses was $692 million, up from $47 million the year-ago quarter. Total consumer provision for credit losses was $848 million compared with a benefit of $29 million in the year-ago quarter.
JPMorgan's credit quality improved during the quarter. As of Jun 30, 2014, nonperforming assets were $9.0 billion, down 18% from $11.0 billion a year ago. Consumer net charge-offs decreased 20% year over year to $1.2 billion. As a result, the consumer net charge-off rate improved to 1.34% from 1.66% a year ago.
JPMorgan's capital ratios showed a decline during the quarter. Tier 1 capital ratio was 11.1% as of Jun 30, 2014, compared with 12.1% as of Mar 31, 2014. Tier 1 common equity capital ratio was 9.8% as of Jun 30, 2014, compared with 10.9% as of Mar 31, 2014.
Book value per common share was $55.53 as of Jun 30, 2014 compared with $54.05 as of Mar 31, 2014 and $52.48 as of Jun 30, 2013. Tangible book value per common share came in at $43.17 as of Jun 30, 2014 compared with $41.73 as of Mar 31, 2014 and $39.97 as of Jun 30, 2013.
In Our View
The banking behemoth is working hard to reduce costs and improve top line to regain its earnings strength. In addition to the ongoing workforce reduction strategy, the company has started seeking avenues to slash wasteful expenditure. (Read: JPMorgan Aims at Prudent Cost Management )
However, nagging legal issues though lower than before, and prevalence of a tough industry backdrop would drag its bottom-line improvement.
Pressure on interest margin with no expectation of interest rate hike in the near term and the impact of a stringent regulatory environment might also mar its results going forward. However, improving retail and investment banking (with heightened M&A activities and IPOs), credit trends and business banking originations are expected to support the bottom line.
In the banking sector, Wells Fargo & Company ( WFC ) kicked off the earnings season, for a change, and displayed the weakness in the broader industry. However, as JPMorgan is the largest bank by assets, its impressive results will inject optimism into the key banking sector.