JPMorgan Chase (JPM - Free JPMorgan Chase Stock Report), the largest bank in the United States and a member of the Dow Industrials, kicked off the bank earnings season with better-than-expected September-quarter results. The stock rose modestly in Tuesday morning trading despite signs of an increasingly difficult operation climate.
The company earned $2.68 a share in the September term, exceeding the $2.34 it logged in the year-earlier period and our estimate of $2.45. Although net interest income inched only 1% higher, fee-based income advanced 22%, supporting a 7% increase in revenues, which offset larger loan loss provisions and a 4% increase in expenses.
The Consumer & Community Banking segment led the way. Segment revenues rose 5%, driven by home loan production, auto lease volume, and higher card income. Efficiency efforts and lower deposit insurance charges helped hold expense growth to 4%. Credit costs ticked up, largely reflecting an increase in reserves for credit card loan losses and a smaller reduction in reserves for home loans than in the like period of 2018.
The Corporate & Investment Bank also performed well, although profits in the September period weren't as strong as in the first two quarters of 2019. Segment revenues increased 6% year to year, largely propelled by higher debt and equity underwriting income and strong fixed-income markets revenues, reflecting improved market conditions. But margin compression depressed treasury management revenues and equity markets income declined 5% compared to a strong prior year. Segment expense rose only 3%, allowing corporate & investment banking profits to advance 7% year to year.
JPMorgan's two other business segments didn't fare as well. Profits in the Commercial Banking division fell 14% year to year. Revenues slipped 3%, driven by margin compression, and expenses ticked up 3%, due to investments in the business. Asset & Wealth Management income declined 8%. Segment revenues about matched the year-earlier tally, with the benefit of higher average market levels and loan growth offset by margin pressure. Investments in technology and advisors pushed expenses modestly higher.
While it was a decent quarter for JPMorgan, the operating climate clearly has become more challenging. Lower interest rates are contributing to the margin compression throughout the company. And loan growth has slowed to a 3% pace if one excludes home loans sold in the September term. (Including the loan sale, average loans were flat.) In addition, credit costs probably will continue to rise, in part as JPMorgan builds up loan loss reserves.
On the other hand, JPMorgan's diversification ought to work to its advantage in the year ahead. Strength in fee-based revenues should help offset further pressure on net interest income in the next several quarters. Revenue growth also ought to benefit from expansion in new markets and the company's continued heavy investment in its businesses. Given the 15% share-net advance in the September quarter, we have raised our full-year 2019 estimate, from $10.10 to $10.65. We expect 2020 to be a more difficult year, but still look for results to increase modestly, to $10.75 a share, compared to our previous call of $10.15.
As for the stock, the dividend yield is attractive and may interest income-oriented investors. But the issue continues to trade near its all-time high, and has very limited total return potential to 2022-2024. Most investors may want to wait for a better entry point before making commitments.
About The Company:JPMorgan Chase & Co. is a global financial services firm with assets of $2.6 trillion and operations worldwide. The company is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management. 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.
– Theresa Brophy
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
