JPMorgan Profit Soars with First Republic & Record Net Interest Income

JPMorgan Chase, America’s largest bank kicked off the banking sector’s second quarter earnings season on Friday before the market opened. JPM profit jumped 67%, including a lift from acquiring the failed First Republic Bank in early May. FRC led to an immediate $2.7 billion gain but the bank also took $1.2 billion in credit charges. Four of the largest U.S. financial institutions also reported, Wells Fargo (WFC), Citigroup (C), BlackRock (BLK) and State Street (STT). Notably all exceeded consensus earnings estimates for the June quarter and didn’t sound any real macro alarm bells.

john pierpont morgan
JPMorgan

State Street however got hit hard with its report noting that servicing fees decreased 3% year-over-year while management fees decreased 6%.

JPM Q2 2023 Earnings

Q2 2023 earnings released earnings at 6:45 a.m. ET; conference call at 8:30 a.m. ET

Highlights

  • Profit rose to $14.47 billion up from $8.65 billion, or $2.76 a share, a year ago
  • EPS: $4.75 (exp $3.83)
  • Revenue rose 34% from a year earlier to $41.31 billion. Analysts had expected $38.66 billion.
  • Excluding First Republic, JPMorgan said profit still would have been up 40% and revenue would have been up 21%.
  • Net-interest income $21.78 billion, third-straight record.
  • Net-interest margin slipped to 2.62% from 2.63% in the first quarter.
  • Consumer bank’s revenue +37%. Profit +71% to $5.31 billion
  • Revenue from payments operations rose 51%.
  • Spending on credit cards rose 8% and card-loan balances jumped 16%.
  • Auto lending increased, with loan volume up 71%.
  • Mortgage origination was slower than a year ago, but picked up from the start of the year.
  • Investment Banking Rev. $1.49B (est $1.38B) including fees from mergers and the sales of stocks and debt, dropped 6%.
  • Commercial bank benefited from a gain of clients from First Republic, revenue rose 49%.
  • In asset and wealth management, revenue climbed 15%.
  • Provision For Credit Losses $2.90B (est $2.62B)
  • Set aside $1.5 billion for possible loan defaults in the future, including $1.2 billion for First Republic loans, compared with $428 million a year ago.
  • ROE 20% (est 16.3%)
  • FICC Sales & Trading Rev $4.57B (est $4.3B) Trading revenue fell 10%, with fixed-income revenue down 3% and equities down 20%.

JPM: Stock Market Reaction

  • 148.67 ▼ -0.20 (-0.13%) today
  • 148.67▲ +40.72 (+37.7%) past year
  • 148.67▲ +37.42 (+33.63%) past 5 years
  • 52wk High $152.89
  • 52wk Low $101.28

Net Interest Income Benefit

JPM benefited from net interest income with the bank’s more disciplined approach than others on deploying cash, and now has the opportunity to extend duration at higher rates. Net interest income hit a third straight record. The net-interest income margin slipped to 2.62% from 2.63% in the first quarter. That margin had been rising significantly from quarter to quarter as its lending income more than doubled.

In the five quarters since March 2022 when the Fed started to increase rates, JPMorgan has earned $95.3bn in net interest income, up from $66.1bn in the prior five quarters.

Benefit from an influx of deposits after Silicon Valley Bank and Signature Bank

JPMorgan’s deposits rose 1 per cent during the quarter to just shy of $2.4 trillion. JPMorgan’s commercial bank, which was expected to benefit from a gain of clients from First Republic, revenue rose 49%. In asset and wealth management, revenue climbed 15%.

JPMorgan’s lending business got s lift from First Republic. JPMorgan also benefited from a $1.8bn gain relating to the First Republic deal. Back in March and April JPMorgan saw “significant new account opening activity” and deposit inflows in its commercial bank, CFO Barnum said.

The money flows implied “an intra-quarter reversal of the recent outflow trend as a consequence of the March events,” Barnum said. “We estimate that we have retained approximately $50 billion of these deposit inflows at quarter-end.”

That helped cushion a larger trend of customers pulling money out of the regulated banking system as they realize they can earn higher yields in places like money market funds.

Outlook

Chief Executive Jamie Dimon said in a release earnings from its lending business would continue to increase this year on the back of higher interest rates as the largest US bank reported a jump in profits in the second quarter. Dimon said US consumers’ finances remained “healthy” but that spending levels were slowing.

JPMorgan increased its net interest income target for 2023, excluding its trading division, to about $87bn from around $84bn.

JPMorgan Last Quarter Earnings

Higher rates increase margins but there is a cost

With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues rose from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.

Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.

However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.

Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPM in Q1 2023 took an $868 million loss on the sale of investment securities whose values have plunged with rising rates.

Source: JPM, WFC, C, BLK,

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