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Upholding the banking banner, JPMorgan Chase & Company (JPM - Analyst Report) delivered a positive earnings surprise of about 11% for the second quarter. The banking giant reported record earnings per share of $1.60, surpassing the Zacks Consensus Estimate of $1.44 and the year-ago earnings of $1.21. With this, JPMorgan has delivered six straight positive earnings surprises.

Our proven model predicted that JPMorgan will beat earnings as it had the right combination of two key ingredients – the earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +0.69% and Zacks Rank #2 (Buy).

JPMorgan was able to dodge the impact of a number of legal and regulatory issues as well as counter fundamental pressures from a low interest rate and sluggish loan growth with help of the underlying strength in its business segments and solid performance by its client franchises. Additionally, favorable macroeconomic elements helped JPMorgan overcome its difficulties to a great extent.

Earnings per share for the reported quarter comprised a few significant nonrecurring items. These included a benefit of 15 cents from lower loan loss reserves in Real Estate Portfolios, an advantage of 9 cents from reduced credit card loan loss reserves and an outflow of 9 cents for additional litigation reserves in Corporate. Without these after-tax items, JPMorgan would have earned $1.45 per share, still a penny ahead of the Zacks Consensus Estimate.  
 
The reported results primarily benefited from improved net revenue and significantly lower provision for credit losses, partially offset by higher-than-expected non-interest expenses. Marked improvement in Consumer deposits and Credit Card sales volumes were the highlights of the quarter. Though the company’s wholesale loan portfolios did not perform better than the prior quarter, credit card portfolios showed continued improvement.  

Most noticeably, the Corporate & Investment Bank segment showed solid improvement during the quarter. The division maintained its #1 rank in Global Investment Banking fees. It also ranked #1 in global debt, equity and syndicated loans. All the other segments also showed decent improvement but for Corporate/Private Equity which reported a loss.
    
Quarter in Detail

Managed net revenue of $26.0 billion in the quarter was up 13% from the year-ago quarter. The figure also compared favorably with the Zacks Consensus Estimate of $24.7 billion.

Managed non-interest revenue increased by $3.5 billion from the year-ago quarter to $15.1 billion. However, net interest income fell 4% year over year to $10.9 billion, primarily reflecting the impact of low interest rates as well as lower loan yields and portfolio run-off.

Non-interest expense was $15.9 billion, up 6% from the year-ago quarter. Higher compensation expense and litigation reserves were primarily responsible for this rise.

Managed provision for credit losses decreased 78% from the year-ago quarter to $47 million. Total consumer provision for credit losses was a benefit of $29 million versus an expense of $171 million in the year-ago quarter. This reflects improved delinquency trends, continued home price improvement and reduced estimated losses in the mortgage and credit card portfolios.

Credit Quality

JPMorgan’s credit quality improved during the quarter. As of Jun 30, 2013, nonperforming assets were $10.9 billion, down 4% from $11.4 billion a year ago. Consumer net charge-offs decreased 35% year over year to $1.5 billion. As a result, the consumer net charge-off rate improved to 1.66% from 2.51% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.4% as of Jun 30, 2013. This includes the impact of the Basel 2.5 rules. The estimated Basel III Tier 1 common ratio was 9.3% as of the same date, up from 8.9% as of Mar 31, 2013. The estimated Basel III liquidity coverage ratio was 118% as of Jun 30, 2013.

Book value per common share was $52.54 as of Jun 30, 2013 compared with $52.02 as of Mar 31, 2013 and $48.40 as of Jun 30, 2012.

The Federal Reserve approved JPMorgan’s proposed capital plan, but the banking giant needs to resubmit its plan by the end of third quarter 2013. The capital plan is required to address the weakness recognized in the bank’s planning process.  

In Our View

The banking behemoth is working hard to offset the pressure on net interest margin and the impacts of a stringent regulatory environment. But these might mar its results to some extent going forward. However, rapidly improving retail and investment banking performances, and continued improvement in credit trends are expected to remain the growth drivers.

Moreover, 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 going forward.

Among the banking big shots, JPMorgan, with exposure in almost all banking businesses, has kicked off the second quarter earnings with Wells Fargo & Company (WFC - Analyst Report). Therefore, the release is going to be a significant indicator of performance by the key banking sector.
 
Among other Wall Street big shots, Citigroup, Inc. (C - Analyst Report) is scheduled to release its second quarter results on Jul 15 and Goldman Sachs Group Inc. (GS - Analyst Report) will report on Jul 16.

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