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We expect JPMorgan Chase & Co. (JPM - Analyst Report) to beat earnings expectations when it reports second-quarter 2013 results before the opening bell tomorrow, Jul 12.
Why a Likely Positive Surprise?
Our proven model shows that JPMorgan has the right combination of two key ingredients to beat earnings.
Positive Zacks ESP: The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for JPMorgan is +2.11% – the difference between the Most Accurate estimate of $1.45 and the Zacks Consensus Estimate of $1.42. This indicates a likely positive earnings surprise.
Zacks Rank #2 (Buy): JPMorgan’s Zacks Rank of 2 increases the predictive power of its ESP. The combination of its Zacks Rank and Earnings ESP makes us confident of a positive earnings surprise in the to-be-reported quarter.
Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.
Expected Earnings Drivers
Cost containment is expected to be the primary driving factor this quarter. JPMorgan has progressed well with respect to its cost cutting efforts through workforce reduction announced earlier this year. It planned to axe as many as 17,000 jobs, including 13,000–15,000 positions in mortgage banking, by the end of 2014. Mortgage banking job cuts will in particular be reflected in JPMorgan’s expenses for the quarter.
Moreover, top-line growth is expected to be significant primarily on higher trading revenues. As capital market activities witnessed improvement during the April–June period with continued support from the Fed, the propensity to invest in the market increased.
Also, in a persisting low interest rate environment, trading activities for financial instruments that are not interest rate sensitive and offer better returns have increased. As a result, trading revenue should strongly support the top line this time around.
Though we don’t expect any significant improvement in interest income due to sluggish loan growth, an uptick in mortgage activity should make up the shortfall.
Another major contributor to the bottom line should be lower provision for loan loses due to overall macroeconomic improvement. Additionally, we expect continued improvement in asset quality trends – including declines in net charge-offs (NCOs) and nonperforming assets (NPAs).
Similar to the first quarter, activities of this banking giant during the second quarter were sufficient to win analysts’ confidence. The Zacks Consensus Estimate for the second quarter has inched up by a cent to $1.42 per share over the last 7 days on an obvious tendency for upward estimate revision.
Other Stocks to Consider
JPMorgan is not the only bank looking up this earnings season. Here are some other banks you might consider as our model shows the right combination of elements in these to result in an earnings beat:
Wells Fargo & Company (WFC - Analyst Report) has an earnings ESP of +1.09% and carries a Zacks Rank #3. Its second quarter release is scheduled on the same day as JPMorgan.
Fifth Third Bancorp (FITB - Analyst Report) has an earnings ESP of +2.27% and carries a Zacks Rank #3. It is scheduled to report second quarter results on Jul 18.
The earnings ESP for Citigroup Inc. (C - Analyst Report) is +0.86% and it carries a Zacks Rank #3. The company is scheduled to release second quarter results on Jul 15.
In the banking sector, JPMorgan, which has exposure in almost all banking businesses, is set to kick off the second quarter earnings with Wells Fargo. Therefore, the release will be a significant indicator of performance in the key banking sector.