JPMorgan Benefitting from Fed Rate Hikes with Record Quarterly Net Interest Income

JPMorgan Chase, America’s largest bank kicked off the banking sector’s third quarter earnings season on Friday before the market opened. Federal Reserve’s interest-rate hikes helped $JPM report its highest quarterly net interest income ever. The bank raised its guidance for the year on consumer strength though the bank recognized a $959 million net investment securities loss, which “reflected higher net losses on sales of U.S. Treasuries and mortgage-backed securities”. Investment-banking fees were down sharply again as expected.

john pierpont morgan
JP Morgan

JPM added net interest income spectacularly with the bank seen to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates.

BlackRock (NYSE: BLK) reported Thursday. First Republic Bank (FRC), Coastal Financial (CCB), JP Morgan (JPM), US Bancorp (USB), PNC Financial Services (PNC), Morgan Stanley, Wells Fargo (NYSE: WFC), Citigroup (NYSE:C), Goldman Sachs Group Inc., and Bank of America Corp will all report Friday through Monday.

JPM Earnings

Q3 2022 earnings release at 7 a.m. ET; conference call at 8:30 a.m. ET

  • EPS $3.12 (est $2.88)
  • Revenue $32.70B (est $32.35B)
  • Investment Banking Revenue $1.71B (est $1.59B)
  • Investment-banking fees fell 47%
  • FICC Sales & Trading Revenue $4.47B (est $4.11B)
  • Trading revenue rose slightly, with a 22% jump in fixed income offset by an 11% drop in equities.
  • Provisions For Credit Losses $1.54B (est $1.22B)
  • Non-interest expenses rose 12% to $19.2 billion. Costs are up 7% for the first nine months of the year.
  • JPM Pre-market $110.27+0.90 (0.82%). Shares of JPMorgan were down 28% this year prior to the release.

Credit Losses

The firm set aside $1.5 billion for potentially soured loans, more than the $1.2 billion analysts expected. Last quarter JPM added to the $900 million set aside for potential future losses last quarter with another $428 million. The bank also temporarily suspended share buybacks.

Investment Banking Losses

Investment-banking fees fell 47% to $1.71B less than analysts expected $1.59B. JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Buybacks and stress test change to Tier 1 ratio

JPM temporarily suspended share buybacks in July in order to quickly meet higher capital requirements while maintaining flexibility to navigate a changing economic environment. In the year preceding the pause, the firm had averaged about $2.2 billion of buybacks a quarter. Dimon said in the statement Friday that the firm hopes to resume buybacks early next year.

The buyback pause is needed to quickly meet higher capital requirements and “allow us maximum flexibility to best serve our customers, clients and community through a broad range of economic environments,” Chief Executive Officer Jamie Dimon said in a statement last quarter.

JPMorgan said in Q2 regulators will require its common equity Tier 1 ratio to be 12.5% by the first quarter of next year, due to a harsher stress-test result and a previously flagged increase to its buffer for systemic importance. That’s up from a minimum of 11.2% at the end of June, and significantly higher than the 11.7% requirement that the firm told investors just two months ago to expect for early 2023.

The buyback break should allow the bank to get to 13.2% by next March, comfortably clearing regulators’ bar. However, that affects the cost of handing back money to investors: JPMorgan had averaged about $2.2 billion of buybacks a quarter over the past year, on top of $3 billion a quarter of dividend payments.


JPMorgan raised its guidance for this year’s NII excluding its markets business, saying it now expects about $61.5 billion. The firm said in July it would pull in at least $58 billion from that source.

“In the US, consumers continue to spend with solid balance sheets, job openings are plentiful and businesses remain healthy,” Chief Executive Officer Jamie Dimon said in a statement Friday. “However, there are significant headwinds immediately in front of us,” the CEO said, citing high inflation leading to higher global interest rates, quantitative tightening, the war in Ukraine, and “the fragile state of oil supply and prices.”

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began. Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Source: JPM, WFC, C, BLK,

Live From the Pit

From The TradersCommunity Research Desk