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Trading, Mortgage Banking to Aid JPMorgan (JPM) Q2 Earnings

Coronavirus-related concerns resulted in a rise in market volatility during second-quarter 2020. With a spike in volatility and higher client activities, JPMorgan’s JPM trading business is likely to have got a substantial boost. Markets revenues, which constitute almost 20% of total revenues, are likely to be a major supporting factor for its upcoming results, slated to release on Jul 14, before market open.

Similar to the first quarter, the coronavirus pandemic and concerns surrounding its impact on the economy weighed on investor sentiments. Thus, investors kept moving toward safe havens like Treasury bonds and other commodities like gold. So, JPMorgan’s equity and fixed income markets revenues are expected to have improved in the to-be-reported quarter.

At an investor conference in late-May, management provided outlook related to markets revenues. The bank expects markets revenues to be up more than 50% year over year, riding on robust fixed income and equity trading revenues.

The Zacks Consensus Estimate for equity trading revenues of $2.13 billion suggests a rise of 23.3% from the prior-year reported number. The consensus estimate for fixed income trading revenues indicates a jump of 54.4% year over year to $5.7 billion.

Other Factors at Play

Mortgage Banking Fees to Jump: While growth in new originations had been muted, the Federal Reserve’s accommodative monetary policy and historically low mortgage rates during the second quarter drove refinancing activities. Thus, these factors are expected to have supported JPMorgan’s mortgage banking fees in the to-be-reported quarter.

The consensus estimate for mortgage fees and related income of $455 million indicates a surge of 63.1% from the prior-year reported number.

Investment Banking (IB) Fees to be Muted: Deal making went for a toss in second-quarter 2020 as the coronavirus pandemic continued to wreak havoc, and the economy and business activities almost came to a grinding halt. Global M&As plunged to the lowest level in more than a decade. Thus, JPMorgan’s advisory fees are likely to have been negatively impacted.

Further, IPO activities declined before picking up a bit in the last weeks of June. Nonetheless, as companies tried to build liquidity to tide over the pandemic crisis, there was a substantial rise in follow-up equity issuances.

Also, amid near-zero interest rates and the Federal Reserve’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, growth in JPMorgan’s equity underwriting and debt origination fees (accounting for almost 60% of total IB fees) is expected to have been solid in the second quarter.

Management expects IB fees in the June-end quarter to be up by a percentage in the mid- to high teens, despite 15-20% decline in M&As.

The consensus estimate for IB fees of $1.5 billion indicates a 19.2% decline from the prior-year reported number.

Net Interest Income (NII) to Fall: The overall lending scenario remained decent during the second quarter, with commercial and industrial, along with real estate loan portfolios having offered significant support. Conversely, as consumer sentiments dipped amid virus concerns, the demand for consumer loans was hit hard.

With the Federal Reserve cutting interest rates to near zero in March to support the U.S. economy, JPMorgan’s net interest yield and NII are likely to have been adversely impacted.

Management expects NII (depending on market conditions) to be $13.7 billion, indicating roughly 5% year-over-year decline.

Expenses to Rise: With JPMorgan’s plan of entering new markets by opening branches is already on track, operating expenses are likely to have remained on the higher side. Also, higher investment in technology to strengthen digital offerings might have resulted in a rise in costs in the to-be-reported quarter.

However, with most of the branches either closed or working with limited staff, overhead expenses are likely to have fallen.

Asset Quality to Worsen: As JPMorgan is likely to have built loan loss reserves owing to deterioration in the macro-economic backdrop, overall asset quality is expected to have deteriorated in the second quarter.

Management anticipates credit reserves to increase by an amount “roughly equivalent” to $7 billion that the company added in the first quarter in order to protect itself from a potential wave of loan defaults.

The consensus estimate for non-performing assets is pegged at $6.79 billion for the to-be-reported quarter, which indicates a 29.1% jump from the prior-year quarter. Likewise, the consensus estimate for non-accrual loans of $6.09 billion suggests a 25.1% rise on a year-over-year basis.

Here is what our quantitative model predicts:

Our proven model shows that JPMorgan has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for JPMorgan is +27.51%.

Zacks Rank: It currently carries a Zacks Rank #3.

JPMorgan Chase Co. Price and EPS Surprise

JPMorgan Chase  Co. Price and EPS Surprise

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

However, the Zacks Consensus Estimate for earnings of $1.40 indicates a 46% plunge from the year-ago reported number. Further, the consensus estimate for sales of $28.8 billion suggests a marginal year-over-year fall.

Other Major Banks Worth a Look

Here are a few other major bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:

Citigroup C is scheduled to release quarterly results on Jul 14. The company has an Earnings ESP of +46.32% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for PNC Financial PNC is +22.65% and it carries a Zacks Rank of 3, at present. The company is slated to report quarterly numbers on Jul 15.

BNY Mellon BK is slated to report quarterly earnings on Jul 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.75%.

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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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