The nation’s largest bank kicked off Q3 earnings season with robust results, particularly in investment banking.
JPMorgan Chase (NYSE:JPM) ushered in the start of the third quarter earnings season Friday morning with results that were better than most analysts had anticipated.
The nation’s largest bank saw revenue rise 7% year over year to $42.6 billion, which was solidly higher than the consensus estimates of $41.4 billion.
On the bottom line, JPMorgan Chase’s net income dropped 2% to $12.9 billion, but earnings per share rose 1% to $4.37 per share. That came in well above the consensus estimates that ranged from $3.99 per share to $4.01 per share.
As one of the first major companies to report earnings each quarter, and as the largest bank, serving as somewhat of a bellwether for the economy and markets, JPMorgan Chase’s results offer a somewhat promising start to earnings season.
JPMorgan Chase stock was up about 5% in morning trading. The Dow Jones Industrial Average was also trending higher, up 181 points, or 0.4%, while the S&P 500 rose 11 points, or 0.2%.
Investment banking surprises
JPMorgan Chase generated better than anticipated results within its Commercial and Investment Bank (CIB) segment, which recorded revenue of $17 billion, up 8% year over year. The main revenue driver in CIB was investment banking, which saw a 29% revenue increase to $2.4 billion, with investment banking fees rising 31%. Also, under CIB, Markets and Securities Services, the institutional trading arm, experienced an 8% increase in revenue to $8.4 billion.
Overall, net income in the CIB segment rose 13% in the quarter to $5.7 billion.
Gains in investment banking and markets helped offset a difficult quarter in JPMorgan Chase’s largest business line, Consumer and Community Banking (CCB). CCB revenue was down 3% in Q3 to $17.8 billion, while net income plummeted 31% to $4.0 billion.
The Banking and Wealth Management arm within CCB saw revenue fall 11% to $10.1 billion, hurt by lower net interest income on deposit margin compression, with high deposit rates eating into profits. Loans were up 1% year over year, while deposit balances were down 8%. A bright spot was Card Services and Auto, where revenue rose 11% to $6.4 billion. This segment benefitted from higher net interest income on higher interest rates.
Earnings in CCB were dragged down by higher provision for credit losses, which is money the bank must set aside to cover defaults. The provisions in Q3 were 93% higher at $2.8 billion, which had a major impact on earnings. This segment accounted for the bulk of the $3.1 billion in provisions for credit losses the firm set aside this quarter.
The higher provisions for credit losses reflected higher net charge-offs of $1.9 billion, which was $520 million more than the same quarter a year ago. Net charge-offs are loans that won’t be repaid. The higher provisions also included an $876 million reserve build, added to cover potential future defaults, driven by higher credit card balances and uncertain macroeconomic variables. In Q3, the delinquency rates for home, auto, and card lending all went up.
Overhead ratio drops
JPMorgan Chase is known for its fortress balance sheet, so it is better equipped than most companies to handle uncertain economic conditions or market volatility. Its balance sheet remains strong, with a common equity tier 1 ratio of 15.5%, a liquidity measure that is considerably higher than regulatory minimum.
CEO Jamie Dimon said the company has a total loss-absorbing capacity of $544 billion and cash and marketable securities of $1.5 trillion, buttressing its fortress.
Another key measure for banks is the efficiency, or overhead, ratio, which shows how much the company spends to generate revenue. JPMorgan’s overhead ratio of 53%, down from 63% a year ago, meaning it is more efficient, paying less to generate earnings. JPMorgan Chase has traditionally been the most efficient large bank.
In its Q4 outlook, JPMorgan Chase expects net interest income of $22.9 billion in Q4, which would be down slightly from Q3. For the full year, the firm anticipates $92.5 billion in net interest income.
Dimon sounded a somewhat cautious tone in his comments, citing geopolitical uncertainties.
“Additionally, while inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world,” Dimon said. “While we hope for the best, these events and the prevailing uncertainty demonstrate why we must be prepared for any environment.”
Is JPMorgan Chase stock a buy?
Investors were pleased with the Q3 results, even with the net income decline, and were not scared off by the murky macroeconomic outlook, as JPMorgan Chase stock surged 5% higher Friday. The stock price is now up about 29% year-to-date.
The consensus among analysts calls for a median price target of $225 per share, which is up about 6% from the current price, but that target could be adjusted post-earnings.
JPMorgan Chase is still relatively cheap, trading at 11 times earnings. There is a lot of economic uncertainty ahead, given the U.S. elections, but if any bank is built to navigate uncertainty, its JPMorgan Chase. The stock is definitely a hold, and its almost always a solid buy, particularly at this valuation.
