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Trading, IB & Mortgage to Aid JPMorgan's (JPM) Q1 Earnings

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The $1.9-trillion stimulus package, falling coronavirus infection rate, rise in vaccination coverage, concerns over inflation and expectations of faster-than-expected economic rebound led to a rise in market volatility during first-quarter 2021. So, the spike in volatility, along with higher client activities, is likely to have supported JPMorgan’s (JPM - Free Report) trading business. Markets revenues, which constitute almost 20% of total revenues, are likely to be reflected positively in its upcoming results, scheduled to release on Apr 14, before market open.

Similar to the past couple of quarters, all major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the first quarter, with both the S&P 500 and Dow Jones touching new highs. On the other hand, the performance of tech-heavy Nasdaq was not that impressive owing to investors rotating into cyclical sectors. Along with impressive equity markets performance, fixed income trading remained strong, driven by the Federal Reserve’s bond-buying program. Hence, 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 February-end, Jennifer Piepszak, CFO at JPMorgan, said that though trading revenues have risen "meaningfully" in the current quarter so far, the trend could change, owing to impressive prior-year figures.

The Zacks Consensus Estimate for equity markets revenues of $2.32 billion suggests a rise of 3.6% from the prior-year reported number. The consensus estimate for fixed income trading revenues of $5.13 billion indicates an increase of 2.7%.

Other Key Factors

Investment Banking (IB) Fees: After a stellar second-half 2020 performance, deal making continued at a faster pace in first-quarter 2021 on the back of gradual global roll-out of COVID-19 vaccines, a brighter macroeconomic outlook and lower interest rates. Though the deal volume didn’t show much improvement, the total value of pending/completed transactions rose drastically.

Hence, 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.

Continuing with the momentum that started in the second half of last year, the IPO market remained active in the to-be-reported quarter. 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 steady 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 first quarter.

Management expects IB fees to be up modestly, with overall pipeline remaining robust. Also, it expects M&As to be active, given the improvement in “overall CEO confidence.” Further, momentum in equity capital markets is anticipated to continue.

The consensus estimate for IB fees of $2.02 billion indicates 8.2% 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 further traction during the first quarter, a substantial rise in originations was witnessed as prospective home-buyers entered the housing market to take advantage of the low rates. Also, mortgage-banking business got a boost from increase in 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 $557 million suggests a jump of 74.1% from the prior-year reported number.

Net Interest Income (NII): Similar to 2020, demand for loan remained soft during the first quarter of 2021. Nonetheless, commercial real estate loan and consumer loan (except credit cards) portfolios offered some respite. The primary reason for low demand for loans continues to be slow resumption of business activities.

This, along with the low interest rate environment, is likely to have hurt JPMorgan’s net interest yield and NII in the quarter, while steepening of the yield curve (the difference between short and long-term interest rates) might have offered some support.

Management expects NII to be roughly $13.6 billion.

The Zacks Consensus Estimate for NII of $13.22 billion suggests an 8.4% decline from the prior-year number.

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 and business expansion plans might have resulted in a rise in costs in the to-be-reported quarter.

Asset Quality: With the economic improvement from the coronavirus pandemic, JPMorgan, similar to the second half of 2020, is likely to have released reserves that it had taken to cover losses from the effects of the pandemic. So, this might have supported the company’s earnings in the to-be-reported quarter.

The consensus estimate for non-performing assets is pegged at $11.18 billion, which indicates a 74.1% jump from the prior-year quarter. Likewise, the consensus estimate for non-performing loans of $10.52 billion suggests a 76.2% 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 +0.33%.

Zacks Rank: It currently carries a Zacks Rank #3.

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. Price and EPS Surprise

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

The Zacks Consensus Estimate for earnings has been revised 2.7% upward to $3.01 over the past seven days. The estimated figure indicates a jump of 285.9% from the year-ago reported number. Also, the consensus estimate for sales of $29.88 billion suggests a 5.8% year-over-year rise.


Other Big Banks to Consider

Here are other big 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:

The Earnings ESP for Wells Fargo (WFC - Free Report) is +5.32% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Apr 14.

Citigroup (C - Free Report) is slated to report quarterly results on Apr 15. The company has an Earnings ESP of +4.48% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bank of America (BAC - Free Report) is slated to report quarterly earnings on Apr 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.49%.

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