JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), is expected to report EPS of $1.42 reflecting rising profits, on Friday as the big bank kicks off the earnings season for the financial sector along with Wells Fargo & Co (NYSE:WFC). Below we highlight what investors will be looking for in the numbers based on recent reports (hint: it wont be about the London Whale).
Anthony Polini of Raymond James states:
Our 2Q13E EPS of $1.43 compares to the Street mean of $1.42 and range of $1.29 to $1.63. Gordon Smith, CEO of Consumer and Community Banking, recently presented at an investor conference and provided a more favorable outlook for NCOs and reserve releases for 2013. As a reminder, on Tuesday, May 21, 2013, Jamie Dimon won the vote to keep his roles as both chairman and CEO of the company at the annual shareholder meeting, and we expect the earnings focus to be on operations as the company moves forward and puts the London Whale incident behind it.
We expect noninterest income to remain strong in 2Q13 as market-related revenue continues to come in at high levels, albeit down on a LQ basis. Credit quality should remain a positive, as NCOs and nonperforming assets (NPAs) are expected to decline 7% and 6% LQ, respectively. The reserve release could prove higher than the $1.0 billion we have modeled in 2Q13 following a $1.1 billion drawdown in 1Q13. We have modeled for a 1% LQ increase in loans following almost a 1% contraction at the holding company in 1Q13. As a reminder, wholesale loan growth slowed to 1% in 1Q13 from almost 4% in 4Q12. Mortgage banking income should remain high, but we have modeled only a modest decrease to $1.4 billion from $1.5 billion in 1Q13. We expect the NIM to contract 2 bp in 2Q13 to 2.35% from 2.37% in 1Q13. (Analyst coverage: )
Matt O’Connor, CFA of Deutsche Bank
JPMorgan Chase & Co. (NYSE:JPM) (JPM, Buy) – Improving expense leverage, well-positioned for consumer recovery and attractive valuation. Expects net II to be down ~1% in 2013, with modest NIM pressure offset by earning asset growth, driven by commercial, wholesale, and asset mgmt loans. Would need 30-40bps higher long rates to neutralize securities book pressure. $2.1b of additional net II assuming a +100bps parallel move beyond the forward curve. $200m CCB net II drag from spread compression to be offset by deposit balance growth. $400m Mortgage Banking net II drag driven by real estate run-off. Expects net II to be down ~1% in 2013, with modest NIM pressure offset by earning asset growth, driven by commercial, wholesale, and asset mgmt loans. Would need 30-40bps higher long rates to neutralize securities book pressure. $2.1b of additional net II assuming a +100bps parallel move beyond the forward curve. $200m CCB net II drag from spread compression to be offset by deposit balance growth. $400m Mortgage Banking net II drag driven by real estate run-off.
Jason M. Goldberg, CFA of Barclays
By business line we expect results in 2Q13 to evidence: 1) Corporate & Investment Bank– higher revenues from 2Q12 led by improved trading despite late June choppiness (but down from 1Q13); 2) Consumer & Business Banking – further deposit growth, easing deposit margin pressure; 3) Mortgage– a fall-off in originations and a decline in GOS margin as quarter progressed mitigated by continued loan loss reserve release; 4) Card – Continued loan loss reserve release, a pick-up in balance growth; 5) Commercial Banking – continued loan growth and sound asset quality; 6) Asset Management – mixed results with higher equity markets mitigated by lower fixed income values/flows; and 7) Corporate/Private Equity – higher interest rates and putting liquidity to work could aid CIO. Overall expenses should be controlled, while share buyback is modest.
JPMorgan Results:
We expect JPMorgan Chase & Co. (NYSE:JPM) to report 2Q13 EPS of $1.44 vs. consensus of $1.43 and our prior estimate of $1.36. Overall trading revenues (though could have tapered into quarter-end) and loan loss reserve releases (card, mortgage) are expected to exceed our beginning of the quarter forecast. JPMorgan Chase & Co. (NYSE:JPM) has exceeded consensus in 16 of the past 17 quarters (4Q11 was the exception).
JPMorgan Drivers:
Relative to 1Q13, we expect modest balance sheet expansion, a lower NIM, higher IB fees, lower trading revenues (but up from 2Q12), fading mortgage results, controlled expenses, sound asset quality trends (lower NPAs, stable NCOs, continued reserve release), growing capital ratios and a modestly lower share count.
JPMorgan Outlook:
For 2013, we expect We expect JPMorgan Chase & Co. (NYSE:JPM) to point to continued balance sheet growth, ability to better manage its net interest margin, decent capital markets backlog, controlled expenses, sound asset quality though better to the end of loan loss reserve releases in some categories, and continued, albeit modest, share repurchase.
Todd L. Hagerman of Sterne Agee
Focus on earnings leverage – repsectable balance sheet growth, well controlled expenses expected for 2Q13. Update on compliance and progress with risk management framework and regulatory orders Credit quality expected to continue to improve – outlook on Card and HELOC remains upbeat Capital markets revenues strong – up 5% from 2Q12, although down 15-20% l/q
Rates Posted By JPMorgan And Wells Fargo
Mortgage companies have some pricing power and in the last month, rates posted by JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) on 30-year mortgages have increased significantly. Primary Secondary spreads have remained relatively stable quarter to date compared to 1Q13 averages, and spot rates are actually higher. Factoring in this, shifts in duration and the cost associated with adding hedges during a rising rate environment, we would expect to see priced-in margins at conventional originators to be somewhat reduced in 2Q13 vs. 1Q13. Our Primary Secondary spread model suggests once we factor in changes in estimated durations on mortgage collateral that cash gain on sale margins at conventional lenders are down in 2Q13. Because of the higher cost associated with putting on additional hedges in a rising rate environment and pricing lags, we would not be surprised to see cash gain on sale margins decline by ~10% between 1Q13 and 2Q13.
