JPMorgan Chase & Co. (JPM - Analyst Report) , which has gained nearly 7% since handily beating earnings estimates in the second quarter, might run out of steam after kicking off the third quarter bank earnings season on Oct 14. While the second-quarter beat was driven partly by strong trading activity and loan growth, these might not suffice in helping the bank to surpass estimates this time around.
The support from trading activity and cost containment may not wane, but tepid demand for loans (particularly from corporates) and super-low interest rates could keep profits under pressure.
While estimate revisions for Q3 earnings over the last 30 days don’t reflect pessimism with most estimates moving higher, core business activities might not live up to investors’ expectation. The Zacks Consensus Estimate moved up 1.5% over the same period.
Further, with increasing earnings expectations, the chance of a beat is becoming dimmer. And anything but a beat will hold the stock back from moving higher.
Our quantitative model also doesn’t point to an earnings beat. Here’s why:
JPMorgan doesn’t have the right combination of the two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings beat.
Zacks ESP: The Earnings ESP for JPMorgan is -1.44%. This is because the Most Accurate estimate of $1.37 is lower than the Zacks Consensus Estimate of $1.39.
Zacks Rank: JPMorgan carries a Zacks Rank #2 (Buy), but this alone isn’t enough to increase the chance of an earnings beat.
Looking at the fundamentals, here are the factors that should be at play:
Trading revenues may not be strong enough: Trading revenues are likely to improve primarily driven by higher fixed-income trading, but may compare unfavorably with the big jump in the second quarter caused by Brexit-induced uncertainty. Trading in equities is likely to typically remain subdued due to feebler client activity. Unlike the last few quarters and some of the major banks, the company hasn’t conclusively hinted anything about trading revenues so far.
No major improvement in advisory and underwriting revenues: JPMorgan’s revenues from advisory and underwriting are not likely to witness and significant improvement, as M&A activities and IPOs continued to decline during the quarter in the wake of global economic concerns. While the volume of M&A deals announced declined in Q3, higher-than-Q2 completed deals in the quarter should bring some respite.
Mortgage business momentum is likely to continue: JPMorgan might have generated decent mortgage revenues, as people may have rushed to get homes financed to avoid higher rates later. However, unlike Wells Fargo and U.S. Bancorp, JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, so the contribution of mortgage revenue gains to total revenues will not be extraordinary.
Commercial and industrial loan growth running out of steam: Commercial and industrial loans across the industry were flat during the quarter compared with Q2, according to recently data from the Federal Reserve. This may have kept the overall loan growth subdued. As expanding loans was one of the major ways to dodge margin pressure caused by the low rate environment for major banks including JPMorgan in the last few quarters, Q3 may witness significant revenue pressure.
Energy sector lending should not be a big pain: While energy loans are still a concern, the provision requirement should not be as high as it was at the beginning of the year, thanks to the recovery in oil prices. The chance of its energy loans turning into bad loans in the quarter is lower.
Continued focus on expense cuts should support earnings: JPMorgan continued with its efforts to keep expenses at check. Moreover, there were no major outflows related to legal settlements that might impact the firm’s earnings unusually in the to-be-reported quarter.
Stocks That Warrant a Look
Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination for an earnings beat this time around:
State Street Corporation (STT - Analyst Report) , which is expected to report on Oct 26, has an Earnings ESP of +0.80% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
TCF Financial Corporation (TCB - Analyst Report) has an Earnings ESP of +3.33% and carries a Zacks Rank #3. The company is scheduled to release results on Oct 21.
Synovus Financial Corporation (SNV - Analyst Report) has an Earnings ESP of +2.00% and carries a Zacks Rank #3. It is scheduled to report results on Oct 18.
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