Trading, Loan Growth To Support JPMorgan's (JPM) Q4 Earnings

JPMorgan’s (NYSE:JPM) trading revenues in the fourth quarter are likely to be positively impacted by substantial volatility, which drove its performance in the first three quarters of the year as well. As trading revenues constitute almost one-fifth of the bank’s top line, this is expected to support its results scheduled to be announced on Jan 15.

During the fourth quarter, several developments — including further escalation of U.S.-China trade war, Brexit-related uncertainty, fears of global economic slowdown, changing yield curve and the Federal Reserve’s stance related to interest rate hikes — rocked the markets and kept the trading desks busy. So, this incited substantial volatility and resulted in a rise in client activity.

Further, at an investors’ conference in early December 2018, JPMorgan’s CEO Jamie Dimon projected trading revenues to be flat year over year in the to-be-reported quarter.

Like the prior quarters, equity trading is mainly expected to support trading revenues. The Zacks Consensus Estimate for equity trading revenues of $1.42 billion reflects a jump of 23.7% from the prior-year quarter. Further, per the consensus estimate, fixed income trading revenues will likely be down 5.1% year over year to $2.11 billion.

Apart from this, here are some of the other primary factors that will likely influence JPMorgan’s fourth-quarter results:

Modest net interest income growth: A slight improvement in lending scenario — mainly in the areas of commercial and industrial (C&I), commercial real estate and consumer — will likely lead to an increase in net interest income (NII). A rise in interest rates will offer some support despite flattening of the yield curve and steadily increasing deposit betas in the fourth quarter.

Also, the Zacks Consensus Estimate for average interest earning assets of $2.23 trillion for the fourth quarter indicates a 2% year-over-year increase. This, along with modest lending activities, is projected to boost the company’s NII in the to-be-reported quarter.

For 2018, management expects NII to be roughly $55.5 billion (up from $50 billion in 2017), benefiting from loan growth and higher rates. Further, average core loan growth (excluding CIB loans) is expected to be in the range of 6-7%. Also, management projects C&I loans to grow in the mid-single-digit rates.

Disappointing investment banking performance: Seasonality hurt investment banking revenues in the fourth quarter. Fears of global economic slowdown and increased volatility weighed on companies’ plans to raise capital by issuing shares. Nonetheless, JPMorgan’s top position in the market is expected to provide some respite, which may result in a slight increase in equity underwriting fees.

Further, rise in interest rates is likely to have slowed down companies’ involvement in debt issuance activities. As debt origination fees account for about half of total investment banking fees for JPMorgan, this is expected to have an adverse impact on investment banking revenues to some extent.

Additionally, decline in global M&A deals in the fourth quarter will likely hurt the company’s advisory fees to an extent. Volatile markets and increase in borrowing costs are some of the key reasons that hampered deal making activities. Nevertheless, JPMorgan's top position in garnering global investment banking fees, and the strong M&A deal pipeline over the prior quarters are likely provide the bank some leverage.

Notably, the consensus estimate for total banking revenues (of which investment banking revenues constitutes a major portion) of $3.04 billion indicates a marginal fall from the prior-year quarter.

Slowdown in mortgage banking: With the refinance boom almost ending and interest rates rising, a big help is not expected from this segment. Further, home equity loan portfolio is likely to decline in the to-be-reported quarter. As JPMorgan hasn’t bulked up its mortgage banking businesses since the last recession, it is expected to witness muted growth in the same.

Lesser scope of cost containment: As the majority of unnecessary expenses have already been cut by the bank, expense reduction will not likely be a major support. As JPMorgan’s plan to enter newer markets by opening branches is already a work in progress, operating expenses are likely to remain on the higher side. Also, increased investment in technology to strengthen digital offerings will result in a rise in costs.

Management expects adjusted operating expenses to be nearly $63.5 billion in 2018.

Here is what our quantitative model predicts:

The chances of JPMorgan beating the Zacks Consensus Estimate this time are high as it has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

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 +0.03%.

Zacks Rank: JPMorgan carries a Zacks Rank #3, which increases the predictive power of ESP.

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. Price and EPS Surprise | JPMorgan Chase & Co. Quote

The Zacks Consensus Estimate for earnings of $2.19 reflects 23.9% growth on a year-over-year basis. Further, the consensus estimate for sales of $26.7 billion shows 10.4% increase from the prior-year quarter.

Other Stocks That Warrant a Look

Here are a few other major bank stocks that you may want to consider, as our model shows that these have the right combination of elements for an earnings beat this time around:

U.S. Bancorp (NYSE:USB) is scheduled to release results on Jan 16. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.15%.

M&T Bank Corporation (NYSE:MTB) is scheduled to release results on Jan 17. It has an Earnings ESP of +1.03% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BB&T Corporation (NYSE:BBT) is +0.64% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jan 17.

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