ii view: JP Morgan profits fly as it beds down First Republic bank

Rising interest rates are having a broadly beneficial impact on this leading bank. Buy, sell, or hold?

Second-quarter results to the 30 June 

• Revenue up 34% to $42.4 billion
• Net income up 67% to $14.47 billion
• Earnings per share up 72% to $4.75

Chief executive Jamie Dimon said:

“Almost all of our lines of business saw continued growth in the quarter. The U.S. economy continues to be resilient. Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. I want to welcome our new First Republic colleagues and thank all of our employees.”

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ii round-up:

US bank JPMorgan Chase & Co (NYSE:JPM) detailed both revenues and earnings which beat Wall Street estimates, as higher interest rates pushed net interest income up by almost a half.

In a quarter in which the US banking mammoth acquired troubled regional bank First Republic, total revenues climbed 34% to $42.4 billion or 21% when stripping out its acquisition, surpassing estimates nearer to $39 billion. Adjusted earnings of $4.37 beat forecasts nearer to $4 per share. 

Shares in the Dow Jones constituent rose more than 2% in early US trading having come into this latest announcement up by a tenth year-to-date. That’s similar to Asian focused Standard Chartered (LSE:STAN) and ahead of a 5% gain for US rival Citigroup Inc (NYSE:C). 

Revenue for JP Morgan’s traditional banking business climbed 37% to $17.2 billion, or by 31% excluding First Republic, pushing divisional profits up 71% to $5.3 billion. Bad debt provisions totalled $1.9 billion and included a $408 million reserve for First Republic. 

Revenues for its Corporate and Investment Banking division increased by a more sedate 4% to $12.5 billion. Investment Banking fees dropped 6% and followed lower M&A advisory fees. Sales for its Fixed Income business retreated 3% to $4.6 billion, while Equity Market related revenues dropped by a fifth, hindered by a tough year ago comparative. Corporate banking revenues rose by close to third to $4.2 billion. 

The New York headquartered bank continued to summarise its balance sheet as ‘fortress’ like, with its capital cushion or CET1 ratio after the First Republic purchase staying the same as in the previous quarter at 13.8%. 

Assets under management for its wealth division increased 16% to $3.2 trillion, aided by net fund inflows. The bank previously declared a quarterly dividend of $1 per share, unchanged from the prior quarter. 

ii view:

JP Morgan operations cover both traditional consumer and corporate banking along with investment banking and asset management. A stock market value of over $430 billion is comfortably above second place Bank of America Corp (NYSE:BAC) at around $235 billion and Wells Fargo & Co (NYSE:WFC) at $163 billion. Its home North American market generates its biggest slug of sales at around three-quarter of overall revenues, with Europe and Africa next at over a tenth. 

For investors, accompanying management comments highlighting large government fiscal deficits and the continued war in Ukraine warrant consideration. A hike too far in interest rates could push the US economy into recession, potentially creating further bad-debt provisions, activity for its investment bank remains subdued, while job layoffs from tech giants such as Microsoft could start to squeeze unemployment higher.

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On the upside, rising rates are increasing overall revenues given the push to interest income. The benefits of a diversified business model covering both traditional and investment banking are historically evident, bad debt provisions taken in the past have regularly proved more than sufficient to cover actual future defaults, while a forecast dividend yield of close to 3% is not to be overlooked.   

On balance, and while an estimated price to net value of 1.5 times is comfortably above most rivals, quality rarely comes cheap, with this well-managed banking giant arguably still justifying its place in diversified portfolios.

Positives: 

• Business diversity
• Investing in technology

Negatives:

• Economic outlook uncertainty
• Elevated costs

The average rating of stock market analysts:

Buy