By Nupur Anand and Pritam Biswas
NEW YORK (Reuters) -JPMorgan Chase shares fell more than 5% after the president of the largest U.S. bank tempered the outlook for its earnings from interest payments as interest rates are expected to ease.
President and Chief Operating Officer Daniel Pinto said forecasts for net interest income (NII), or the difference between what the bank makes on loans and pays out on deposits, were overly optimistic.
The Federal Reserve is widely expected to lower its key policy rate by at least 25 basis points at its Sept. 17-18 meeting, kicking off a monetary easing cycle that would lead to smaller-than-expected increases in banks' interest income.
"NII expectations are a bit too high," Pinto told investors at a conference in New York, without providing a revised estimate. "Next year is going to be a bit more challenging."
Pinto also said that expenses could inch up next year.
JPMorgan had forecast in May its NII would rise to $91 billion this year as interest rates remained elevated, excluding its markets division.
"The commentary about too much optimism on NII for 2025 from the management has rattled the market," said Chris Marinac, director of research at financial adviser Janney Montgomery Scott.
"There are incremental worries around the economy and the political climate," which are likely to contribute more volatility in shares over the next two months, he said.
JPMorgan shares fell as much as 7.5%, their worst daily drop since June 2020, before closing 5.2% lower.
JPMorgan's comments reveal a risk of some pressure on earnings which will accelerate in the coming months, Octavio Marenzi, CEO of consulting firm Opimas.
"However, the hit that JPMorgan's stock has taken is outsized. Other U.S. banks swim in the same water and will see a similar downturn."
JPMorgan's total investment banking fees could climb by 15% in the third quarter, Pinto added.
The bank's profit rose to a record in the second quarter, buoyed by a 46% jump in investment banking revenue. Rivals including Citigroup and Wells Fargo also reported strong gains in investment banking.
Revenue from JPMorgan's newly merged commercial and investment bank unit also jumped to a record $35.5 billion in the first half.
Trading revenue is expected to be flat or rise 2% in the third quarter, while volumes for mergers and acquisitions will probably stay steady, Pinto said. That compares with a 10% trading revenue increase in the second quarter.
The prediction echoes more subdued guidance from Goldman Sachs for trading revenue to likely fall 10% in the third quarter. Citigroup estimated on Tuesday that markets revenue would probably drop about 4%.
Bank shares fell after the Fed outlined on Tuesday a sweeping overhaul to ease two major draft bank capital rules following intense industry lobbying against the U.S. central bank's proposal to set aside more capital for different businesses.
The draft rules required the biggest U.S. lenders to hike their capital by around 19%. A major rewrite lowered the level to 9%, but analysts said that failed to meet market expectations.
"I thought these changes will be positive for the bank, but clearly the street was looking for a bit more," said Stephen Biggar, banking analyst at Argus Research.
"Banks are down across the board, but the larger the bank, bigger the hit and that could also be impacting the JPMorgan stock."