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Trading, Higher Rates, Loans to Aid JPMorgan (JPM) Q3 Earnings

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After witnessing a gradual normalization of trading activities since the second half of 2021, the same has turned around since the beginning of this year. Thus, trading revenues are expected to have been a bright spot for JPMorgan (JPM - Free Report) in the third quarter of 2022 as well. Thus, market revenues (comprising nearly 20% of the company’s total revenues) might have offered some support to its earnings, scheduled to be released on Oct 14, before the opening bell.

The developments since the start of 2022, including Russia’s invasion of Ukraine and continued supply chain disruptions, have led to uncertainty among investors. Also, fears of a severe economic slowdown amid the ultra-aggressive stance of the central banks across the globe to control inflation drove client activity and trading volume during the third quarter.

These factors have led to heightened volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. So, JPMorgan is likely to have recorded a decent improvement in market revenues this time.

Notably, during an investor conference call in mid-September, the company’s chief operating officer Daniel Pinto noted that fixed-income trading volumes benefited from heightened market volatility and mitigated lower equity trading. The bank’s market revenues are anticipated to be up almost 5% year over year. Our estimate for the metric stands at $6.6 billion, indicating a 5.3% rise.

JPM’s market revenues are accounted for in the Corporate & Investment Bank segment. The Zacks Consensus Estimate for the segment’s total net revenues of $11.83 billion indicates a fall of 4.5% from the prior-year reported number.

Other Major Factors at Play

Loan Demand & Net Interest Income (NII): Lending activities continued at a decent pace in the to-be-reported quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans (specifically credit cards) accelerated in July and August.

The Zacks Consensus Estimate for JPM’s average earning assets is pegged at $3.44 trillion, suggesting a 6.9% rise on a year-over-year basis. Our estimate for the metric is $3.57 trillion, indicating an almost 11% improvement.

Further, the Federal Reserve continued with the hawkish monetary policy stance, raising the interest rates by another 150 basis points during the quarter. Thus, the policy rate reached 3.0-3.25%, the highest level since 2008. This is likely to have had a favorable impact on JPM’s net interest margin (NIM) and NII. However, the inversion of the yield curve in the September-ended quarter is expected to have weighed on NIM to some extent.

The Zacks Consensus Estimate for NII of $16.92 billion suggests a 29.4% surge. Our estimate for NII implies a jump of 42% to $18.57 billion.

Investment Banking (IB) Fees: After an extraordinary performance for almost two years, global deal-making shrank for the third consecutive quarter. Raging inflation, equity markets rout and fears of recession dealt a blow to the business sentiments and plans for expansion via acquisitions. Thus, both deal volume and total value numbers crashed during the third quarter. Also, JPMorgan’s leadership in the space is less likely to have offered much support to advisory fees.

For similar reasons, IPOs and follow-up equity issuances dried up in the to-be-reported quarter. Bond issuance volume witnessed a decline too. Hence, JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have been hurt during the September-ended quarter.

Pinto stated that the slowdown in deal-making is showing no signs of reversal as clients remain on the sidelines amid ambiguity over inflation, the Fed’s rate hikes and the prospects of a recession. Management expects IB revenues to plunge 45-50% year over year. We expect the same to be $1.56 billion, reflecting a sharp decline of 48.5%.

Mortgage Banking Fees: Since the beginning of the year, there have been increasing speculations that the Fed will aggressively raise rates, which has happened. This resulted in a substantial rise in mortgage rates, with the rate on the 30-year fixed mortgage crossing the 6% mark in September.

This kept the home buyers on the sidelines, thus, mortgage origination and refinancing activities decreased drastically. These factors are likely to have weighed on JPMorgan’s mortgage banking income.

The consensus estimate for mortgage fees and related income of $326 million reflects a decline of 45.7% from the prior-year quarter's reported number. Our estimate for the metric is $297.9 million, indicating a 50.4% plunge.

Expenses: JPMorgan’s plan of entering new markets by opening branches, which is already on track, along with inorganic expansion efforts, is likely to have resulted in an increase in operating expenses during the third quarter. Also, investment in technology to strengthen digital offerings might have led to a rise in costs.

Our estimate for non-interest expenses stands at $19.37 billion, reflecting an increase of 13.5% on a year-over-year basis.

Asset Quality: With the rise in loan balance and expectations of economic slowdown due to geopolitical and macroeconomic concerns, JPMorgan is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $1.16 billion against a provision benefit of $1.53 billion a year ago.

The Zacks Consensus Estimate for non-performing assets (NPAs) of $7.74 billion implies a 12.9% decline year over year. The consensus estimate for non-performing loans (NPLs) of $6.93 suggests a 16% fall. Our estimates for NPAs and NPLs are $8.16 billion and $7.48 billion, respectively.

What the Zacks Model Unveils

Our proven model doesn’t predict an earnings beat for JPMorgan this time around. This is because it does not 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.

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 -0.50%.

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

The Zacks Consensus Estimate for third-quarter earnings has been revised marginally upward to $2.98 over the past seven days. Yet, the estimated number reflects a decline of 20.3% from the year-ago reported number. Our estimate for earnings is the same as the consensus number.

On the other hand, the consensus estimate for sales of $32.10 billion suggests an 8.3% year-over-year rise. Our estimate for sales is $32.13 billion.

Banks Worth a Look

Here are a couple of 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 Morgan Stanley (MS - Free Report) is +0.59% and it carries a Zacks Rank #3, at present. The company is slated to report third-quarter 2022 results on Oct 14.

Over the past 30 days, MS’ Zacks Consensus Estimate for quarterly earnings has moved 2.6% lower.

Associated Banc-Corp (ASB - Free Report) is scheduled to release third-quarter 2022 earnings on Oct 20. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +2.39%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ASB’s quarterly earnings estimates have moved 1.7% upward over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.


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