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Dismal Trading, Low Rates to Hurt JPMorgan (JPM) Q2 Earnings

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After witnessing remarkable client activities and market volatility over the past five quarters, market normalization and reduced volatility in the second quarter 2021 are expected to have dampened JPMorgan’s (JPM - Free Report) trading business. Markets revenues, which constitute almost 20% of total revenues, are likely to have an adverse impact on its upcoming results, slated to be released on Jul 13, before market open.

Similar to the past few quarters, all major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the second quarter and touched new highs. However, low volatility might have affected equity volumes. On the other hand, the Federal Reserve’s bond-buying program is likely to have offered support to fixed-income trading volumes. Hence, JPMorgan’s equity and fixed income markets revenues are expected to have been decent in the to-be-reported quarter.

At an investor conference in mid-June, JPMorgan signaled an end to the pandemic-era trading boom. The company’s CEO Jamie Dimon projected a 38% year-over-year plunge in trading revenues. He stated that the quarter will be “more normal” for trading business, with revenues coming in at “something a little bit north of $6 billion, which is still pretty good, by the way.”

Other Major Factors at Play

Investment Banking (IB) Fees: After a stellar performance over the past few quarters, deal making continued at a rapid pace in second-quarter 2021 on the back of global roll-out of COVID-19 vaccines, brighter macroeconomic outlook, proposed tax rate hikes by President Joe Biden, cash reserves and lower interest rates. Both the deal volume and total value witnessed drastic improvement. Thus, the bank’s leadership in the space, along with favorable factors, is likely to have resulted in improvement in advisory fees.

Continued momentum in the IPO market and steady rise in follow-up equity issuances are likely to have offered support to equity underwriting fees in the to-be-reported quarter, while sizeable fall in SPAC issuance activity might have offset some of the gains. Bond issuance volume were also decent. Thus, JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have recorded solid growth in the second quarter.

At the conference, Dimon noted that the quarter “could be one of the best quarters you’ve ever seen” for IB business. He said, “I would just use a number like up 20% from both prior year and prior quarter. It could be 15% to 20%.”

The consensus estimate for IB fees of $3.07 billion indicates 7.9% rise from the prior-year reported number.

Mortgage Banking Fees: Low mortgage rates continued to fuel demand for new mortgages. As the stay-at-home orders were lifted and economy rebounded solidly during the second quarter, a substantial rise in originations was witnessed as prospective home-buyers entered the housing market. However, modest refinancing activities and faster prepayments are likely to have offset some of the gains. This is expected to have affected JPMorgan’s mortgage banking fees.

The consensus estimate for mortgage fees and related income of $611 million suggests a plunge of 33.4% from the prior-year reported number.

Net Interest Income (NII): Similar to the past quarters, loan demand (mainly commercial and industrial, and residential real estate loans per the Fed data) remained subdued during the second quarter of 2021 despite re-opening of the economy. Nonetheless, commercial real estate and consumer loan portfolios offered some respite.

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

The Zacks Consensus Estimate for NII of $13.09 billion suggests a 5.5% decline from the prior-year number.

Expenses: With JPMorgan’s plan of entering new markets by opening branches already on track, operating expenses are likely to have remained on the higher side. Investment in technology to strengthen digital offerings and business expansion plans through strategic acquisitions might have resulted in a rise in costs in the to-be-reported quarter.

Asset Quality: Continuing with the trend of the last three quarters and driven by improving macroeconomic backdrop and stable credit market conditions, JPMorgan is likely to have released reserves that it had taken to cover losses from the effects of the coronavirus pandemic. This might have supported the company’s earnings in the to-be-reported quarter.

The consensus estimate for non-performing assets is pegged at $11.06 billion, which indicates a 31% jump from the prior-year quarter. The consensus estimate for non-performing loans of $9.52 billion suggests an 18.3% rise.

What the Zacks Model Unveils

Our proven model shows that JPMorgan doesn’t have 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 -0.04%.

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 nearly 1% upward to $3.05 over the past seven days. The estimated figure indicates a jump of 121% from the year-ago reported number. However, the consensus estimate for sales of $29.98 billion suggests a 9.1% year-over-year decline.

Banks to Consider

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

The Earnings ESP for First Republic Bank is +1.47% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Jul 13.

PNC Financial (PNC - Free Report) is slated to report quarterly results on Jul 14. The company has an Earnings ESP of +6.14% 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 Jul 14. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.55%.

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