JPMorgan Chase & Company (JPM – Free JPMorgan Stock Report), one of the largest banks in the United States and a component of the Dow 30, turned in better-than-anticipated June-quarter earnings, despite mixed results. The stock pulled back modestly Friday morning trading.
The company earned $1.82 a share in the quarter, exceeding our estimate of $1.57 and year-earlier results of $1.55. Share net included an $0.11 legal benefit related to a settlement with the FDIC receivership for Washington Mutual (which Morgan acquired in 2008) and was also helped by releases of Corporate and Commercial banking loan loss reserves.
Looking at performance by business group, Consumer & Community Banking profits declined 16%, year to year, on flat revenues, an 8% rise in expenses, and increased credit costs. Higher net interest income and auto lease revenues were offset by credit card origination costs, the absence of one-time income booked in the 2016 June term, and lower mortgage servicing revenues. Higher auto lease depreciation, business growth, and marketing costs boosted expenses. The increase in credit costs was attributable to a rise in credit card loan losses and increases in reserves for card loans.
Meanwhile, Corporate & Investment Bank profits advanced modestly despite lower revenues, which were held back by a decline in fixed-income markets revenues. The latter was hurt by reduced markets volatility compared to the 2016 June term, which was impacted by the United Kingdom's decision to leave the European Union. But expenses declined on lower performance-based compensation costs. And results included a reversal of $53 million of loan loss reserves.
JPMorgan's other two (smaller) business groups performed relatively well. Commercial Banking profits rose 30%, aided by strong middle market banking revenues and a release of some reserves previously set aside for possible losses on loans to oil and gas companies. Asset & Wealth Management results increased 20%, reflecting strong growth in assets under management and loans.
Looking ahead, the company is likely to encounter a few headwinds. In the Consumer business, credit card growth probably will remain strong, but card losses may hover just below 3% of loans and new card origination costs may remain high. In the Corporate Bank unit, trading revenues in the September term will compare with very strong year-earlier revenues. But JPMorgan had a healthy backlog of merger-related business at midyear, which should support good investment banking revenues. Meanwhile, at some point, the Corporate & Investment Banking and Commercial Banking divisions will start recording provisions for loan losses instead of the credit benefits that they have been logging recently, even though the company believes it has adequate reserves for energy company loans. Given the strong results in the first half of 2017, however, we are raising our share-net estimate for the year, from $6.45 to $6.80. In 2018, assuming more of a benefit from higher interest rates, we now expect JPMorgan to earn about $7.20 a share, up from our previous call of $7.05.
The stock is mostly of interest for income at this time. After passing the recent round of the Federal Reserve's bank stress tests, JPMorgan boosted the dividend on its common stock, from $0.50 a quarter to $0.56, and announced plans to buy back $19.4 billion of common stock. The dividend yield is a bit above the Value Line median. On the other hand, the stock continues to trade within JPMorgan's 3- to 5-year Target Price Range, so its total return potential still appears lackluster.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
