Negotiation, higher rates, loans to help JPMorgan (JPM) Third Quarter Results – October 10, 2022


After witnessing a gradual normalization of business activities since the second half of 2021, the situation has reversed since the beginning of this year. So the trading revenue should have been a beacon of hope for JP Morgan (JPM Free report) in the third quarter of 2022 as well. Thus, market earnings (comprising almost 20% of the company’s total revenue) could have offered support for its earnings, which are expected to be released on October 14, before the opening bell.

Developments since the start of 2022, including Russia’s invasion of Ukraine and continued supply chain disruptions, have led to uncertainty among investors. Additionally, fears of a severe economic downturn amid the ultra-aggressive stance of central banks around the world to control inflation boosted client activity and trading volume during the third quarter.

These factors have led to increased volatility in equity markets and other asset classes, including commodities, bonds and currencies. So JPMorgan probably saw a decent improvement in market earnings this time around.

Notably, on a conference call with investors in mid-September, the company’s chief operating officer, Daniel Pinto, noted that fixed income trading volumes were benefiting from increased market volatility and mitigated the decline in equity trading. The bank’s market revenue is expected to grow nearly 5% year-over-year. Our estimate for the measure is $6.6 billion, indicating a 5.3% increase.

JPM’s market revenues are reported in the Corporate & Investment Bank segment. Zacks’ consensus estimate for the segment’s total net revenue of $11.83 billion indicates a 4.5% decline from the figure reported the previous year.

Other major factors at play

Loan Application and Net Interest Income (NII): Lending activity continued at a decent pace in the quarter ahead. According to the latest data from the Fed, demand for commercial and industrial loans, home loans and consumer loans (especially credit cards) accelerated in July and August.

The Zacks consensus estimate for JPM’s average earning assets is pegged at $3.44 trillion, suggesting a 6.9% year-over-year increase. Our estimate for the metric is $3.57 trillion, indicating an improvement of almost 11%.

Additionally, the Federal Reserve continued its hawkish monetary policy, raising interest rates an additional 150 basis points in the quarter. Thus, the key rate reached 3.0-3.25%, the highest level since 2008. This probably had a favorable impact on JPM’s net interest margin (NIM) and NII. However, the inverted yield curve in the quarter ended September should have weighed on NIM to some extent.

The Zacks consensus estimate for NII of $16.92 billion suggests a 29.4% increase. Our estimate for NII implies a jump of 42% to $18.57 billion.

Investment Banking (IB) Fees: After an extraordinary performance for nearly two years, the number of global transactions fell for the third consecutive quarter. Soaring inflation, the stock market rout and recession fears have taken a toll on corporate sentiment and plans to expand through acquisitions. Thus, the volume of transactions and the total value collapsed during the third quarter. Additionally, JPMorgan’s leadership in the space is less likely to have offered much advisory fee support.

For similar reasons, IPOs and follow-on stock offerings dried up in the quarter to report. The volume of bond issues also fell. As a result, JPMorgan’s underwriting fees (representing nearly 60% of total IB fees) are expected to have been impacted in the quarter ending September.

Pinto said the trading slowdown showed no signs of reversing, with customers staying away amid ambiguity over inflation, Fed rate hikes and the prospect of a recession. Management expects IB’s revenue to fall 45-50% year-over-year. We expect the same amount to be $1.56 billion, reflecting a steep decline of 48.5%.

Mortgage bank charges: Since the start of the year, there has been growing speculation that the Fed will aggressively raise rates, which has happened. This translated into a substantial rise in mortgage rates, with the 30-year fixed rate mortgage rate crossing the 6% mark in September.

This kept home buyers on the sidelines, so mortgage origination and refinancing activity declined significantly. These factors likely weighed on JPMorgan’s mortgage banking income.

The consensus estimate for mortgage fees and related income of $326 million reflects a 45.7% decline from the number reported in the prior year quarter. Our estimate for the metric is $297.9 million, indicating a drop of 50.4%.

Expenses: JPMorgan’s plan to enter new markets by opening branches, which is already on track, along with inorganic expansion efforts, likely led to higher operating expenses in the third quarter. Additionally, investment in technology to bolster digital offerings may have resulted in increased costs.

Our estimate for non-interest expense is $19.37 billion, a year-over-year increase of 13.5%.

Asset quality: With loan balances rising and expectations of an economic slowdown due to geopolitical and macroeconomic concerns, JPMorgan is expected to have built up reserves in the third quarter. Our estimate of the provision for credit losses is set at $1.16 billion versus a provision of $1.53 billion a year ago.

The Zacks consensus estimate for non-performing assets (NPA) of $7.74 billion implies a 12.9% year-over-year decline. The non-performing loan (NPL) consensus estimate of $6.93 suggests a decline of 16%. Our estimates for NPA and NPL are $8.16 billion and $7.48 billion, respectively.

What the Zacks Model Reveals

Our tried and tested model does not predict an earnings beat for JPMorgan this time around. This is because he doesn’t have the right combination of the two key ingredients – a positive win ESP and Zacks rank #3 (Hold) or better – to increase the chances of a win beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: The earnings ESP for JPMorgan is -0.50%.

Zack’s Ranking: He currently wears a Zacks Rank #2 (Buy).

The Zacks consensus estimate for third-quarter earnings has been revised up slightly to $2.98 over the past seven days. Still, the estimated number reflects a 20.3% drop from the number reported a year ago. Our profit estimate is the same as the consensus figure.

On the other hand, the consensus sales estimate of $32.10 billion suggests an 8.3% year-over-year increase. Our sales estimate is $32.13 billion.

Banks worth visiting

Here are a few bank stocks you might want to consider, as our model shows they have the right mix of elements to outperform this time around:

The ESP on earnings for Morgan Stanley (MRS Free Report) is +0.59% and it carries a Zacks rank of #3, at present. The company is expected to release its third quarter 2022 results on October 14.

Over the past 30 days, MS’s Zacks consensus estimate for quarterly earnings has fallen 2.6%.

Associated Bank-Corp (BSA Free Report) is expected to release its third quarter 2022 results on October 20. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ASB’s quarterly earnings estimates rose 1.7% over the past month.

Stay on top of upcoming earnings announcements with Zacks Earnings Calendar.


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