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Trading, IB & Mortgage to Support JPMorgan (JPM) Q4 Earnings

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Coronavirus-related health crisis, vaccine breakthroughs and the U.S. Presidential elections led to a rise to market volatility during fourth-quarter 2020. Hence, the spike in volatility, along with higher client activities, is likely to have substantially supported JPMorgan’s (JPM - Free Report) trading business. Markets revenues, which constitute roughly 20% of total revenues, are likely to be reflected positively in its upcoming results, scheduled to release on Jan 15, before market open.

So, JPMorgan’s equity and fixed income markets revenues are expected to have improved in the to-be-reported quarter. Further, at an investor conference in early December 2020, management provided outlook related to markets revenues. The bank expects markets revenues to be up 20% year over year.

The Zacks Consensus Estimate for equity markets revenues of $1.62 billion suggests a rise of 7.4% from the prior-year reported number. The consensus estimate for fixed income trading revenues of $3.80 billion indicates an increase of 10.2%.

Other Key Factors to Influence Q4 Performance

Investment Banking (IB) Fees: Deal making continued at a fast pace in fourth-quarter 2020 as economic and business activities resumed globally. Hence, JPMorgan’s advisory fees are likely to have been favorably impacted.

Likewise, IPO activities continued to rise. Also, as companies kept building liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances. Further, amid near-zero interest rates and the Federal Reserve’s bond purchase program (that began in March 2020), bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have recorded solid growth in the fourth quarter.

Management expects IB fees in the December quarter to be up 20% year over year.

The consensus estimate for IB fees of $2.12 billion indicates a 14.8% rise from the prior-year reported number.

Mortgage Banking Fees: Historically low mortgage rates continued to fuel demand for new mortgages. As the stay-at-home orders were lifted and economy gained traction during the fourth quarter, a substantial rise in originations was witnessed as prospective home-buyers entered the housing market again to take advantage of the low rates.

Further, the mortgage-lending business got a boost from higher refinancing activities. These factors are expected to have supported JPMorgan’s mortgage banking fees in the to-be-reported quarter.

The consensus estimate for mortgage fees and related income of $785 million suggests a jump of 65.6% from the prior-year reported number.

Net Interest Income (NII): Similar to the third quarter of 2020, demand for loan remained muted during the fourth quarter, while commercial real estate loan and consumer loan portfolios offered some support. The primary reasons behind low demand were economic slowdown and the pandemic-related scare. This, along with the low interest rate environment, is likely to have hurt JPMorgan’s net interest yield and NII in the quarter.

The Zacks Consensus Estimate for NII of $13.26 billion suggests a 6.4% decline from the prior-year number.

For 2020, management expects NII to be approximately $55 billion (down from $57.2 billion in 2019), largely due to very little appetite for new loans among corporate clients.

Expenses: With JPMorgan’s plan of entering new markets by opening branches is already on track, operating expenses are likely to have remained on the higher side. Also, higher investment in technology to strengthen digital offerings might have resulted in a rise in costs in the to-be-reported quarter.

Management expects expenses to be $66 billion (relatively stable year over year) for 2020, largely on “revenue and volume-related expenses.”

Asset Quality: Having already built significant reserves owing to deterioration in the macro-economic backdrop in the first half of the year, JPMorgan is less likely to have recorded substantial rise in provision for loan losses in the fourth quarter.

Management expects to see a slight uptick in net charge-offs during the to-be-reported quarter, given payment relief and government stimulus already provided.

The consensus estimate for non-performing assets is pegged at $12.03 billion, which indicates a significant jump from the prior-year quarter. Likewise, the consensus estimate for non-accrual loans of $11.15 billion suggests a substantial surge.

What the Zacks Model Unveils

Our proven model shows that JPMorgan has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat this time around.

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

Earnings ESP: The Earnings ESP for JPMorgan is +2.50%.

Zacks Rank: It currently carries a Zacks Rank #2 (Buy).

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. price-eps-surprise | JPMorgan Chase & Co. Quote

For the fourth quarter, the Zacks Consensus Estimate for earnings has been revised 10.7% upward to $2.69 over the past seven days. The estimated figure indicates growth of 4.7% from the year-ago reported number. Also, the consensus estimate for sales of $29.28 billion suggests a 3.4% year-over-year increase.

 

Other Major Banks to Consider

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

PNC Financial (PNC - Free Report) is slated to report quarterly results on Jan 15. The company has an Earnings ESP of +2.54% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Citigroup (C - Free Report) is +2.14% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Jan 15.

Bank of America (BAC - Free Report) is slated to report quarterly earnings on Jan 19. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +5.89%.

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