ii view: Bond trading a boost to JP Morgan

Earnings easily beat forecasts, but is the good news already in the share price?

Fourth-quarter results to the end of December 2019

• Net revenue up 9% to $29.2 billion
• Net income up 21% to $8.5 billion
• Earnings per share up 30% to $2.57

Chief executive Jamie Dimon said:

“JPMorgan Chase produced strong results in the fourth quarter of 2019, capping off a solid year for the Firm. While we face a continued high level of complex geopolitical issues, global growth stabilized, albeit at a lower level, and resolution of some trade issues helped support client and market activity towards the end of the year. The US consumer continues to be in a strong position and we see the benefits of this across our consumer businesses. 

“The Corporate & Investment Bank generated record fourth quarter revenue - including for the Markets business, which rebounded from a challenging prior year. In Asset & Wealth Management, we grew loans and deposits at a healthy pace, and for the full-year, we brought in record long-term net flows of $100 billion.”

ii round-up:

US banking mammoth JPMorgan Chase (NYSE:JPM) reported both revenue and earnings which beat analysts’ forecasts in these fourth-quarter results. 

Revenue for the bank’s bond trading operations led the way, jumping by nearly 90% to $3.4 billion and assisted by a favourable comparison given tough last quarter 2018 trading conditions.  Markets and Securities revenue rose by 55% to $6.1 billion, with overall divisional net income up 48% to $2.93 billion compared to the fourth quarter of 2018.  

The group’s Asset and Wealth Management division enjoyed a 30% gain in earnings, aided by higher investment valuations and a 19% improvement in assets under management. Performance for its Consumer and Community Banking business proved more subdued, hindered by deposit margin compression and lower interest rates. Card and auto loan gains helped the overall division to a 5% rise in earnings. 

The bank, which traces its roots back to 1799 in New York City, posted earnings per share of $2.57, up from $1.98 in the fourth quarter of 2018, comfortably exceeding the analyst consensus estimate of $2.35 per share (source: Refinitiv). 

The share price gained by more than 1% in pre-market US trading. 

ii view:

JP Morgan is a highly diverse US banking giant. Its operations cover both traditional consumer and corporate banking along with investment banking and asset management. With North America generating around three-quarters of its revenues, the bank is seen as offering a broader health check on the wider US economy. 

The long serving experience of its chief executive Jamie Dimon offers reassurance and investment into the bank continues to be made - in 2019, it added over 70 new branches in 16 new markets, continued its Commercial Banking international expansion and became the first US bank to be approved for a majority-owned securities business in China.

For investors, the strength of the US economy remains central. A move into negative interest rates, as seen in Europe, would raise major concerns for its impact on the banking sector. A prospective dividend yield of around 2.5% and covered three times by earnings offers some attraction. But with the share price up over 40% during 2019 alone, and a price-to-net asset value of 1.8 times, comfortably above the three-year average of 1.3 times, a period of share price consolidation could be the order of the day. 

Positives: 

• Business diversity
• Highly regarded chief executive
• The bank passed the Federal Reserve’s most recent stress test

Negatives:

• Heavy exposure to the US economy
• Lower interest rates are broadly bad for bank profitability
• Profit for both its Commercial Banking division fell

The average rating of stock market analysts:

Strong hold