The nation’s largest bank posted strong numbers in Q2, led by a major increase in investment banking revenue.
JPMorgan Chase (NYSE:JPM), the nation’s largest bank, topped earnings and revenue estimates within the second quarter.
The bank, which is among the many first major firms to report earnings each quarter, saw a 22% increase in revenue and a 25% jump in earnings within the quarter, beating estimates on each fronts.
As banks are sometimes viewed as representative of the economy, the most important banks are seen as bellwethers for the quarter, so its strong performance represents a superb begin to the earnings season. But there are some concerns.
Investment banking revenue rises
On the highest line, JPMorgan Chase generated $50.2 billion in revenue in Q2, up 22% from the identical quarter a yr ago and 20% from Q1. This smashed revenue estimates of $42 billion for the quarter.
With regard to profits, JPMorgan Chase posted $18.1 billion in net income, or $6.12 per share, which was 25% higher than the identical quarter a yr ago and 35% higher than Q1. This also topped estimates, which had JPMorgan Chase at $5.88 per share.
JPMorgan Chase was buoyed by a one-time $7.9 billion gain after it cashed Visa stock as a part of an exchange offer. Excluding that windfall, the adjusted net income was $13.1 billion, or $4.40 per share, which fell in need of adjusted earnings estimates.
JPMorgan’s profits got a giant lift from investment banking, which has been stagnant over the past two years as a consequence of the high rate of interest environment. But that modified in Q2 as JPMorgan Chase saw investment banking revenue jump 46% year-over-year to $2.5 billion, while investment banking fees rose 50%.
The firm increased its market share in investment banking to 9.5% and generated more fees than anyone else.
Consumer banking struggles
The explanation why the share price was down on Friday was because JPMorgan Chase had softer numbers in its consumer banking division. The segment posted $17.7 billion in revenue, up 3%, but the most important segment, banking and wealth management, saw a 5% revenue drop to $10.4 billion.
The year-over-year decline was driven by lower net interest income on lower deposit balances and deposit margin compression. This shows that prime rates of interest are continuing to hamper banking profits as net interest income — the income a bank generates on interest on loans after interest on deposits are paid out — was flat at $13.7 billion.
The bank did, nonetheless, raise its outlook for net interest income in fiscal 2024 to $91 billion, from $90 billion the previous quarter. This is probably going based on an expectation of the Federal Reserve cutting rates of interest at the least once and potentially twice.
Higher provisions for credit losses
The opposite drag on earnings was provision for credit losses, which banks must put aside to cover potential credit losses from defaults. When these provisions are higher, it relies on the expectation that there shall be more credit losses and infrequently reflects the bank’s view of the economy. In other words, higher provisions could signal a cautious outlook, as CEO Jamie Dimon articulated within the earnings report.
“While market valuations and credit spreads appear to reflect a slightly benign economic outlook, we proceed to be vigilant about potential tail risks. These tail risks are the identical ones that now we have mentioned before. The geopolitical situation stays complex and potentially probably the most dangerous since World War II — though its end result and effect on the worldwide economy remain unknown,” Dimon said.
Dimon added that “there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. Due to this fact, inflation and rates of interest may stay higher than the market expects.”
Still a superb buy
The stock price was down about 2% on Friday morning, because the markets put more weight on the negatives than the positives.
But JPMorgan Chase stock stays up about 20% year-to-date (YTD), trading at $204 per share. Analysts have a median price goal of $214 per share, so it is predicted to see modest gains within the second half.
Even with the concerns, JPMorgan Chase should get some tailwinds from rate of interest cuts, which might help each consumer banking and investment banking. Plus, it is sort of low-cost, with a P/E ratio of just 12, so it still looks like a superb buy.