JPMorgan Chase (JPM - Free JP Morgan Stock Report), one of the largest banks in the United States and a Dow-30 component, reported March-quarter earnings that were a bit better than anticipated. The stock, which enjoyed a late 2016 post-election bounce but had largely marked time since the start of 2017, rose slightly in response.
The company earned $1.65 a share in the opening period of 2017 compared with our estimate of $1.53 and the year-earlier result of $1.35. Earnings expectations had mostly trended lower in recent weeks.
On a positive note, revenues rose 6% year to year, driven mainly by loan growth, higher interest rates, and strong underwriting and fixed-income trading income. On the other hand, operating expenses increased a hefty 9%, partly due to higher performance-based compensation costs (reflecting the good investment banking and trading results) and higher legal costs.
Meanwhile, the loan loss provision declined 28%, with a decrease in provisions for commercial loans partly offset by higher credit card loan chargeoffs and a writedown of student loans. Recall that in the first quarter of 2016, JPMorgan built up reserves for oil and gas company loans following the plunge in oil prices. But actual losses on energy loans proved lower than feared, allowing the company to release some of these reserves in the 2017 March term. Reported earnings in the recently ended period also benefited from tax credits and ongoing repurchases of stock, resulting in a 100 million year-to-year reduction in the diluted share count.
By business group, the Corporate & Investment Bank segment and Commercial Banking posted strong revenue and profit advances. But Consumer & Community Banking profits fell 20%, hurt by lower mortgage servicing income, new credit card origination costs, higher auto lease depreciation expense, increased credit card loan losses, and the writedown of student loans. And Asset & Wealth Management profits were pressured by higher legal expenses.
The near-term earnings outlook is mostly positive, despite a few headwinds. Management expects net interest income to increase $4.5 billion in 2017, powered by higher interest rates. It indicated that the investment banking pipeline was healthy. But we're not counting on trading revenues, which depend on market conditions, staying quite as strong as in the March quarter. Too, mortgage and credit card revenues may continue to disappoint. The company expects operating expenses in 2017 to increase 4%, to $58 billion, as investments in mobile banking and processing technology probably will remain high. Too, management looks for about $5 billion in loan losses in 2017, up from $4.3 billion in 2016. And the tax rate over the remainder of 2017 probably will be higher than in the March term. In all, we are raising our 2017 share-net call by $0.20, to $6.60, and are introducing a 2018 estimate of $7.20.
From an investment perspective, the stock price already discounts a good portion of the earnings growth we look for to 2020-2022. Most investors may want to wait for a better entry point. However, the dividend yield, based on a quarterly payout that was recently increased 4%, to $0.50 a share, remains modestly above the Value Line median.
About The Company: JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.
