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Robust Investment Banking to Aid JPMorgan (JPM) Q4 Earnings

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Investment banking (“IB”) fees, one of the main sources of revenues for JPMorgan (JPM - Free Report) , is expected to have witnessed a significant rise in fourth-quarter 2020. Thus, this is likely to have provided much needed support to the bank’s results, slated to be announced on Jan 15.

IB income basically comprises advisory fees (generated from M&As and business restructuring) and underwriting revenues (equity and debt). Let’s check how these are likely to have been in the to-be-reported quarter.

After a disappointing first-half 2020 performance mainly due to the coronavirus pandemic, there was a strong recovery in the deal making activities. During the fourth quarter, the number of announced M&As jumped. Thus, as global M&A activity rebounded during the quarter, JPMorgan’s advisory fees are likely to have been favorably impacted. Also, the bank’s leadership in the space is likely to have offered some leverage.

Also, in light of the pandemic, many companies began business restructuring process with an aim to maintain profitability. This is likely to have aided rise in JPMorgan’s advisory fees as well.

Further, IPO activity was robust. In fact, the fourth quarter of 2020 was one of the busiest in the recent past. A number of tech and healthcare firms along with Special Purpose Acquisition Companies entered the markets. Additionally, driven by favorable markets, several companies shored up their balance sheets through follow-up equity issuances.

Likewise, bond issuance volume has been strong in the fourth quarter along with decent growth in debt issuances. Hence, JPMorgan’s equity underwriting fees and debt origination fees (accounting for almost 60% of total IB fees) are expected to have increased in the fourth quarter.

Also, at an investor conference in early December 2020, management provided upbeat outlook related to IB revenues. The bank expects the same to be up 20% year over year. The Zacks Consensus Estimate for IB fees of $2.12 billion indicates a 14.8% rise from the prior-year quarter’s reported number.

Q4 Earnings & Sales Projections

For JPMorgan, the Zacks Consensus Estimate for earnings has been revised 7.5% upward to $2.72 over the past seven days. The projected figure indicates growth of 5.8% from the year-ago reported number. The consensus estimate for sales of $29.28 billion suggests a 3.4% rise.

Check what other key factors are likely to have influenced JPMorgan’s overall performance during the fourth quarter.

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Our Take

During the fourth quarter, the operating backdrop was challenging. Weak loan demand and low interest rates are likely to have hurt this Zacks Rank #1 (Strong Buy) stock’s top-line growth to some extent. However, solid IB performance, along with decent mortgage banking business and robust trading performance, might have offered support.

You can see the complete list of today’s Zacks #1 Rank stocks here.

IB Performance Expectations for Other Players

Among other companies, IB revenues are a major portion of total revenues for Bank of America BAC, Goldman Sachs GS and Morgan Stanley MS. Similar to JPMorgan, IB performance is likely to have supported the banks’ revenues and earnings in the fourth quarter.

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