JPMorgan Chase, America’s largest bank kicked off the banking sector’s third quarter earnings season on Friday before the market opened. JPM profit jumped 35%, boosted by higher interest rates including a lift from acquiring the failed First Republic Bank in early May. JPM net income climbed to $13.2bn, from $9.7bn a year earlier ahead of the $11.9bn analysts had expected, according to data compiled by Bloomberg. Net interest income, which at $22.7bn 30% higher than the same quarter a year ago. JPMorgan raised its net interest income target for 2023, excluding its trading division, from $87bn to about $89bn.
Four of the largest U.S. financial institutions also reported, Wells Fargo (WFC), Citigroup (C), BlackRock (BLK) and PNC (PNCT). Notably all exceeded consensus earnings estimates for the June quarter and didn’t sound any real macro alarm bells.
JPM Q3 2023 Earnings
Q3 2023 earnings released earnings at 6:45 a.m. ET; conference call at 8:30 a.m. ET
Highlights
- Net income of $13.2 billion, or $4.33 per share, beating the consensus of $3.96.
- Adj Rev $40.69B (est $39.92B)
- Revenue $39.87 billion up 22% Y/Y., compared to $39.63 billion forecasted by analysts surveyed by FactSet
- Consumer & Community Banking revenue increased 29% Y/Y to $18.4 billion,
- Corporate & Investment Banking was $11.7 billion (-2% Y/Y),
- Commercial Banking was $4.0 billion (+32% Y/Y).
- Investment Banking fees were down 3% Y/Y due to lower advisory fees.
- Asset and Wealth Management revenue was $5.0 billion (+10% Y/Y),
- Corporate revenue of $1.6 billion included net investment securities losses of $669 million.
- FICC Sales & Trading Rev $4.51B (est $4.36B)
- Equities Sales & Trading Rev $2.07B (est $2.27B)
- Noninterest revenue was $17.8 billion, up 12% Y/Y, or 8% Y/Y excluding First Republic, driven by higher CIB Markets noninterest revenue, higher asset management fees, and lower net investment securities losses.
- Net interest income increased by 30% Y/Y to $22.9 billion and +21% Y/Y, excluding First Republic.
- Noninterest expense was $21.8 billion, up 13% Y/Y, or +9% Y/Y, excluding First Republic.
- Average loans were up 17%, and average deposits were down 4% for the quarter.
- Debit and credit card sales volume increased by 8% Y/Y,
- Active mobile customers were up 9% Y/Y.
- JPM’s Q3 provision for credit losses was $1.4 billion (-10% Y/Y), including net charge-offs of $1.5 billion and a net reserve release of $113 million.
- Loans $1.31T (est $1.32T)
- Assets under management (AUM) $3.2 trillion (+22% Y/Y),
- Client assets stood at $4.6 trillion (+21% Y/Y), driven by continued net inflows and higher market levels.
- CET1 capital ratio 14.3%
- Advanced CET1 capital ratio was 14.5%, with a total loss-absorbing capacity of $496 billion.
- ROE 18% (est 16%)
- ROTCE 22%.
JPM: Stock Market Reaction
- 151.26 ▲ +5.46 (+3.74%) today
- 151.26 ▲ +41.95 (+38.36%) past year
- 151.26 ▲ +43.41 (+40.23%) past 5 years
- 52wk High $159.38
- 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 fourth straight record. That margin had been rising significantly from quarter to quarter as its lending income more than doubled.
JPMorgan’s chief executive Jamie Dimon said the earnings were “solid” but acknowledged that “these results benefit from our over-earning on both net interest income and below normal credit costs, both of which will normalise over time”.
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
JPMorgan expects net interest income excluding Markets of ~$89 billion (vs. ~$87 billion earlier). It now anticipates card services NCO rate of about 2.50% (vs. 2.60% prior).
It also trimmed its guidance for full-year expenses from roughly $84.5bn to about $84bn.
JPMorgan reported investment banking fees of $1.7bn, down 3 per cent from a year earlier but beating analysts’ estimates of $1.6bn.
Jamie Dimon, Chairman, and CEO said, “Currently, U.S. consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers. However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here.”
“Additionally, we still do not know the longer-term consequences of quantitative tightening, which reduces liquidity in the system at a time when market-making capabilities are increasingly limited by regulations. Furthermore, the war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships. This may be the most dangerous time the world has seen in decades.”
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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From The TradersCommunity Research Desk