About a month has gone by since the last earnings report for JP Morgan Chase & Co (JPM - Free Report) . Shares have added about 1.6% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
JPMorgan Q3 Earnings Beat Despite Trading Weakness
Amid an expected trading slump, rising rates and loan growth drove JPMorgan third-quarter 2017 earnings of $1.76 per share, which easily surpassed the Zacks Consensus Estimate of $1.67. Also, the figure reflects an 11% rise from the year-ago period. Notably, the results included a legal benefit of $107 million.
Solid loan growth (driven mainly by improved credit card loans) and higher interest rates supported net interest income. Further, rise in advisory fees supported top-line growth. A slight fall in operating expenses acted as a tailwind.
As expected, fixed income and equity trading slumped during the quarter. Likewise, underwriting fees (both equity and fixed income) witnessed a fall. Also, a decline in mortgage banking income, due to higher funding costs and fall in mortgage origination volume, was a headwind.
Apart from these, results were adversely impacted by an increase in provision for credit losses, mainly due to reserve build in Card portfolio.
The overall performance of JPMorgan’s business segments, in terms of net income generation, was decent. All segments, except Corporate & Investment Bank, reported a rise in net income on a year-over-year basis.
Among other positives, both credit card sales volume and merchant processing volume grew 13%. Further, both Commercial Banking average loan balances and Asset Management average loan balances rose 10%.
Trading Slump Offset by Higher Rates & Loan Growth, Costs Down
Managed net revenues of $26.2 billion in the quarter were up 3% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $25.7 billion. Rising rates and loan growth were the primary reasons for the top-line improvement. These were partially offset by lower trading revenues, investment banking fees and mortgage banking fees.
Non-interest expenses (on managed basis) were $14.3 billion, down 1% from the year-ago quarter. The fall was primarily driven by lower marketing costs and stable compensation expenses, partially offset by technology, communications and equipment costs.
Credit Quality Worsens
Provision for credit losses increased 14% year over year to $1.5 billion, primarily due to reserve build in Consumer loan portfolio. Also, net charge-offs were up 13% year over year to $1.3 billion.
However, as of Sep 30, 2017, non-performing assets were $6.2 billion, down 21% from the year-ago period.
Strong Capital Position
Tier 1 capital ratio (estimated) was 14.3% as of Sep 30, 2017 compared with 13.6% as of Sep 30, 2016. Tier 1 common equity capital ratio (estimated) was 12.6% as of Sep 30, 2017, up from 12.0% as of Sep 30, 2016. Total capital ratio came in at 16.1% (estimated) as of Sep 30, 2017 compared with 15.1% as of Sep 30, 2016.
Book value per share was $66.95 as of Sep 30, 2017 compared with $63.79 as of Sep 30, 2016. Tangible book value per common share came in at $54.03 as of Sep 30, 2017 compared with $51.23 as of Sep 30, 2016.
For 2017, the company projects NII to increase about $4 billion. Management expects margin expansion to continue over the next several quarters driven by higher rates and deposit re-pricing.
Expect card, commerce solutions and auto division, CCB segment revenue in the fourth quarter 2017 is expected to be relatively flat sequentially as higher net interest income will be offset by the anniversary net impact of Sapphire reserve.
With no change expected in the overall volatility in the fourth quarter, Markets revenues are projected to decline year over year.
Management expects investment banking (IB) fees in the second half of 2017 to be down y/y, as the company had the highest IB fees on record in third quarter 2016. Nonetheless, overall sentiment remains positive with the company expecting equity issuance to continue (given the stable market backdrop) and the M&A backlog to be healthy with conditions remaining beneficial for refinancing activities.
For 2017, management expects adjusted expenses to be nearly $58 billion.
The company expects expenses in CB segment to remain relatively stable on a sequential basis.
Management projects average core loan growth to be around 8% in 2017 that will be funded from strong deposit balance.
For 2017, JPMorgan expects NCOs rate to be relatively flat across all businesses except Cards (up due to continued loan growth and the seasoning of newer vintages) and CIB (down on absence of energy related NCOs). Notably, NCOs are projected to be around $5 billion (excluding NCOs related to the student loan portfolio write-down in the first quarter 2017), driven by loan growth.
Management expects credit card charge-offs to be slightly below 3% for 2017 and in the higher end of 3-3.25% in 2018.
Consumer allowance for credit losses will likely increase $300 million in 2017, owing to growth across businesses, partly offset by allowance releases for the residential real estate portfolio. Further, wholesale allowance for credit losses (excluding energy and metals & mining portfolios) is expected to rise modestly. Management expects potential reserve releases in energy portfolio in the upcoming quarters, reflecting stabilizing oil prices.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.
At this time, JP Morgan's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
The stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.