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Higher Trading & Rates to Support JPMorgan (JPM) Q1 Earnings

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After three consecutive quarters of witnessing muted activities, volatility seems to be back in the market. The expected rise in JPMorgan’s (JPM - Free Report) trading revenues in first-quarter 2018 indicates the same. As trading revenues constitute a major part of the bank’s top line, this is expected to lead the company to report improved results on Apr 13.

In the last two months of the first quarter, the markets experienced significant volatility. In fact, February was one of the most volatile months since 2008, and March 2018 was even worse. The trade war between the United States and China, higher inflation expectation, tightening of monetary policy by the Fed and a sharp sell-off in the tech sector incited volatility during the quarter.

At the annual Investors’ Day conference in late February, management projected first-quarter market revenues to rise mid to high single-digit rate on a year-over-year basis.

Similar to the prior quarters, equity trading revenues are expected to render support to the total trading revenues in the to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.85 billion reflects an increase of 15% from the year-ago quarter and 60.9% jump sequentially. Notably, per the consensus estimate, fixed income trading revenues will remain flat year over year but surge a whopping 91% from the prior quarter to $4.22 billion.

Apart from this, here are the other factors that are anticipated to influence JPMorgan’s Q1 results:

Steady increase in net interest income: In addition to higher interest rates, a moderate improvement in lending — particularly in the areas of commercial and industrial, real estate and consumer — will likely result in higher net interest income (NII).

Additionally, the Zacks Consensus Estimate for average interest earning assets of $2.21 trillion for the first quarter indicates an increase of 2.3% year over year and 1% sequentially. This, along with decent lending activities and higher interest rates, is further projected to boost the company’s NII in the to-be-reported quarter.

On a sequential basis, management expects NII to be slightly lower due to the impact of Tax Cuts and Jobs Act and lower day count, partially offset by the benefits of higher rates and growth.

Muted investment banking performance: The trend of pocketing solid advisory and underwriting fees for debt and equity issuance may reverse to some extent in the to-be-reported quarter, as rising rates are likely to have slowed down corporates’ involvement in these activities. As debt origination fees account for about half of total investment banking fees for JPMorgan, this is expected to have an adverse impact on investment banking revenues.

However, strong equity issuances globally are expected to have boosted IPOs and follow-on offerings. So, the related fees are projected to increase for JPMorgan. Also, a potential rise in fees from increasing M&As in certain sectors will likely support the company in partially offsetting the lost revenues.

Notably, the company expects investment banking income to remain stable or increase marginally year over year.

Slowdown in mortgage banking: With the refinance boom nearing its end, a big help is not expected from this segment. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter. As JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, the company is expected to witness muted growth in the same.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction will not likely be a major support. Also, there were no major outflows related to legal settlements during the quarter that might impact JPMorgan’s earnings unusually.

Here is what our quantitative model predicts:

JPMorgan does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for JPMorgan is -0.80%.

Zacks Rank: JPMorgan carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

JPMorgan Chase & Co. Price and EPS Surprise

 

JPMorgan Chase & Co. Price and EPS Surprise | JPMorgan Chase & Co. Quote

Notably, the Zacks Consensus Estimate for earnings of $2.28 reflects 38.2% growth on a year-over-year basis. Further, the consensus estimate for sales of $27.5 billion show 11.6% increase from the prior-year quarter.

Stocks That Warrant a Look

Here are a few major bank stocks that you may want to consider, as our model shows that these have the right combination of elements for an earnings beat this time around:

Comerica Incorporated (CMA - Free Report) is scheduled to release results on Apr 17. It has an Earnings ESP of +1.16% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation is slated to release results on Apr 19. It has an Earnings ESP of +1.37% and carries a Zacks Rank #3.

The Bank of New York Mellon Corporation (BK - Free Report) has an Earnings ESP of +1.81% and carries a Zacks Rank of 3. The company is also slated to release results on Apr 19.

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