Normalized Trading to Hit JPMorgan (JPM) Q3 Earnings, IB to Aid
Robust IB performance, a modest rise in loan demand, and an improving economy are expected to have supported JPMorgan's (JPM) Q3 earnings amid lower rates and normalized level of trading.
After witnessing robust client activities and market volatility over the past quarters, market normalization and reduced volatility (compared with the prior-year period) in the third quarter 2021 are expected to have dampened JPMorgan’s JPM trading business to some extent. Markets revenues, which constitute nearly 20% of the company’s total revenues, are likely to have an adverse impact on its upcoming results, scheduled to be announced on Oct 13, before market open.
While the quarter begun on a positive note, concerns over accelerating coronavirus infections, renewed inflation fears, signs of a slowdown in China, possibilities of rise in corporate tax rates, fading fiscal stimulus, and the Federal Reserve’s unwinding of bond purchases soon weighed on investor sentiments. Further, concerns related to the financial fallout of the potential failure of China’s Evergrande property group and the debates over the debt ceiling made investors jittery. These factors resulted in a heightened level of equity market volatility during the last few weeks of the third quarter. On the other hand, bond trading remained soft in the June-September quarter.
At an investor conference in mid-September, JPMorgan pointed out that trading business continued to “normalize” in the quarter. Per Marianne Lake, the co-CEO of the company’s CCB segment, though markets revenues are projected to be better than previously expected, it is expected to fall 10% both year over year and sequentially as trading keeps normalizing from exceptionally high levels in 2020. She said, “We’re seeing particular strength in equities, a little less so in FICC.”
Other Major Factors to Impact Q3 Results
Investment Banking (IB) Fees: Like the last few quarters, the third quarter continued to witness a rapid pace of deal-making across the globe. This was largely driven by the resumption of normal business activities, excess cash levels, companies’ appetite for strengthening scale and market share, and solid economic recovery. Both the deal volume and total value witnessed drastic improvement. Thus, JPMorgan’s leadership in the space, along with favorable factors, is likely to have resulted in improvement in advisory fees.
Continued momentum in the IPO market and a steady rise in follow-up equity issuances are likely to have offered support to equity underwriting fees in the to-be-reported quarter. Bond issuance volume remained decent. Thus, JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have recorded solid growth.
At the conference, Lake anticipated IB fees to rise from the prior-year quarter on the back of “continued momentum” in global M&As. At the second-quarter earnings call, the company management had expected the IB fees to be “up year-on-year but down sequentially” following a robust quarterly performance. The company still projects the same view but “more up year-on-year and less down sequentially” than previously anticipated.
The Zacks Consensus Estimate for IB fees of $2.71 billion indicates a 24.2% jump from the prior-year reported number.
Mortgage Banking Fees: Low mortgage rates continued to fuel demand for mortgages during the third quarter of 2021 leading to a rise in new originations. Nonetheless, the origination boom in 2020 driven by the historically low rates make comparison tough for the quarter. Also, a gradual slowdown in refinancing activities and faster prepayments weighed on mortgage banking business.
The consensus estimate for mortgage fees and related income of $522 million suggests a plunge of 52% from the prior-year reported number.
Net Interest Income (NII): Loan demand (except for commercial and industrial per the Fed data) witnessed marginal improvement during the third quarter of 2021. The demand for real estate and consumer loans also accelerated during the quarter.
This, along with, steepening of the yield curve (the difference between short and long-term interest rates) during the quarter, is expected to have extented some support JPMorgan’s net interest yield and NII. However, the persistently low interest rate environment remained a headwind.
The Zacks Consensus Estimate for NII is $13.03 billion. This implies relatively stable performance on a year-over-year basis.
Operating Expenses: JPMorgan’s plan of entering new markets by opening branches, which is already on track, along with inorganic expansion efforts, is likely to have resulted in an increase in operating expenses during the third quarter. Investment in technology to strengthen digital offerings might also have led to a rise in costs in the to-be-reported quarter.
Asset Quality: Continuing with the trend of the last four quarters and driven by improving macroeconomic backdrop and stable credit market conditions, JPMorgan is likely to have released reserves that it had taken to cover losses from the effects of the coronavirus pandemic. This is expected to have supported the company’s earnings in the to-be-reported quarter.
The consensus estimate for non-performing assets is pegged at $10.65 billion, which indicates a 6.9% decline from the prior-year quarter. The consensus estimate for non-performing loans of $9.20 billion suggests a 16.3% fall.
What the Zacks Model Unveils
Our proven model predicts an earnings beat for JPMorgan this time around. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat .
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for JPMorgan is +0.60%.
Zacks Rank: It currently carries a Zacks Rank #3.
JPMorgan Chase & Co. Price and EPS Surprise
The Zacks Consensus Estimate for earnings has been revised 1% upward to $3 over the past seven days. The estimated figure indicates growth of 2.7% from the year-ago reported number. The consensus estimate for sales of $29.9 billion suggests a 2.6% year-over-year rise.
Other Banks to Consider
Here are few other major bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:
U.S. Bancorp USB is slated to report quarterly results on Oct 14. The company has an Earnings ESP of +0.38% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Bank of America BAC is slated to report quarterly earnings on Oct 14. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.30%.
The Earnings ESP for PNC Financial PNC is +2.16% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Oct 15.
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