JP Morgan Chase, America’s largest bank kicks off the banking sector’s second quarter earnings season on Friday before the market opens along with three of the largest U.S. lenders, Wells Fargo (WFC), Citigroup (C) and State Street (STT). JPM’s revenue growth will primarily be driven by higher net interest income, in the first quarter, the bank grew its revenues by 25% primarily due to an expanding net interest margin. However, this has a lagged affect. The acquisition of First Republic Bank however is expected to have supported the company’s net interest income (NII) helping that lagged affect.
There is much to cover with banks following the Fed’s Stress tests. Recommendations from Fed Governor Barr on the potential overhaul of the insured deposits system, heavy borrowing from the Federal Reserve’s discount window and a new Bank Term Funding Program set up to prevent further bank runs and failures.
JPM Earnings Preview
Q2 2023 earnings release at 6:45 a.m. ET; conference call at 8:30 a.m. ET
- Projected EPS: $3.96 a share, up from $2.76 in the prior-year quarter.
- Projected revenue: $39.27 billion, up from previous quarter’s revenue of $38.3 billion.
- Projected Common Equity Tier 1 ratio CET1 from 12.5% to 11.4% following stress tests. (JPMorgan’s Q123 CET1 13.8%)
- The consensus estimates for investment banking revenue is $1.58 billion.
- The consensus estimate for provision for credit losses is $1.91 billion, up 73.3% year over year.
Following the Fed’s stress test JPM made the following. statement:
JPMorgan Chase plans to increase its quarterly common stock dividend to $1.05 per share for Q3 2023, up 5% from its current $1.00 per share dividend.
“We continue to maintain a fortress balance sheet with strong capital levels and robust liquidity, and we remain prepared for a broad range of potential outcomes, including potentially higher future capital requirements from the finalization of the Basel III capital rules,” said Chairman and CEO Jamie Dimon.
Exposure to high interest rates
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.
- Wells Fargo’s net interest income $44.9 billion, 61% of total revenues,
- JPMorgan (JPM) generates 51% of revenue from NII,
- Goldman Sachs (GS) generates 17% of revenue from NII.
Rising interest rates benefit the bank more than its competitors with FRC on board. The Zacks Consensus Estimate for NII (reported) of $20.38 billion suggests a 34.7% surge. Their estimate for NII implies a jump of 42.4% to $21.54 billion.
Investment Banking Losses
JPMorgan investment banking fees weakness has been exacerbated by a decline in large private-equity buyouts. Global deal-making continued to shrink on a year-over-year basis in the second quarter, while green shoots were visible toward the end of the quarter in the IPO market. The deal volume and total value numbers crashed in the second quarter, again.
JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have been hit during the June-ended quarter.
Unrealized Losses on Investment Securities: How large are the losses, have losses been taken and are they hedged? This will affect ROE and EPS. Simply the value of assets held has been diminished, but by how much?
Loan Loss Provisions
The consensus estimate for provision for credit losses is $1.91 billion, a surge of 73.3% year over year.
The Zacks Consensus Estimate for non-performing loans (NPLs) of $6.72 billion implies a 6.2% decline year over year. The consensus estimates for non-performing assets (NPAs) of $7.37 suggests a 6.1% fall. Estimates for NPAs and NPLs are $7.49 billion and $7.03 billion, respectively.
Societe Generale downgrade Citigroup (C), JPMorgan (JPM) and Goldman Sachs (GS) to Hold from Buy
On Friday ahead of earnings Societe Generale cuts the ratings of JPM, C and GS on the risk from rules for Basel 4 to be published in the coming weeks could drive significantly higher capital requirements. “Forthcoming B4 regulations could drive much higher minimum capital requirements” for the lender’s analyst Andrew Lim wrote in a note.
“Our new analysis of how B4 might impact the US banks indicates that it is possible that the inclusion of operational risk in group standardised RWA [risk-weighted assets] and inflation in market RWA will significantly outweigh likely lower credit RWA,” the note said. CITI, in particular, and GS could have more material capital weakness vs peers with respect to minimum capital requirements.
JPMorgan was also cut to Hold with the stock becoming more fully valued after its recent rally.
JPMorgan Last Quarter Earnings
Higher rates increase margins but there is a cost.
Understandably there was a crisis of confidence in regional banks sparked off by last month’s collapse of Silicon Valley Bank. We warned last year higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
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. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter.
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.
Source: JPM, WFC, C, BLK,
Live From the Pit
From The TradersCommunity Research Desk