ii view: JP Morgan thanks Fed rate hikes for revenue boost

Shares in this Wall Street bank are down by almost 30% year-to-date. Buy, sell, or hold? 

Third-quarter results to the 30 September 

• Revenue up 10% $33.5 billion
• Net income down 17% to $9.74 billion
• Earnings per share down 17% to $3.12

Chief executive Jamie Dimon said:

“In the US, consumers continue to spend with solid balance sheets, job openings are plentiful and businesses remain healthy. However, there are significant headwinds immediately in front of us – stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices. While we are hoping for the best, we always remain vigilant and are prepared for bad outcomes so we can continue to serve customers even in the most challenging of times.”

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ii round-up:

US banking giant JPMorgan Chase & Co (NYSE:JPM) today detailed both revenue and earnings that beat Wall Street estimates as it continued to navigate a series of tail and headwinds. 

Revenue of $33.5 billion exceeded analyst forecasts for nearer $32 billion, pushed higher by a one-third increase in interest income to $17.6 billion following a series of Federal Reserve rate hikes. Earnings however fell 17% year-over-year to $3.12 per share, impeded by the addition of $0.8 billion in bad debt provisions. 

JP Morgan shares rose by over 3% in US trading having come into this latest announcement down by close to a third year-to-date. Shares for rival Citigroup Inc (NYSE:C) are down by a similar amount, while the benchmark S&P 500 has fallen by a fifth. 

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Overall profit for JP Morgan’s corporate and investment banking division fell by just over a third to $3.5 billion, hindered by a near halving in investment banking fees. It also booked $959 million of net investment securities losses, shaving 24 cents off overall group earnings per share. Revenues for its Markets & Securities business climbed 5% to $7.9 billion given strong activity for its fixed income or bonds business. 

Revenues for JPM's more traditional banking business rose 14% to $14.3 billion, aided by 9% growth in average deposits, with credit card sales growing 13%. Home lending net revenue however fell by a third to $920 million, hindered by reduced volumes. Divisional costs rose 11%, pushed higher by wage compensation and technology investments.

Assets under management for its wealth division fell 13% to $2.6 trillion, crimped by falling markets and net outflows. 

The New York headquartered bank previously declared a third-quarter dividend of $1 per share, in line with the previous quarter. 

Its share buyback programme remains halted following previous caution given rising economic and geopolitical uncertainty, although management remains hopeful that it will restart early next year. 

ii view:

Tracing its roots back to 1799, today JP Morgan operations cover both traditional consumer and corporate banking along with investment banking and asset management. During its last full financial year, North America generated just around three-quarters of overall revenues, with Europe and Africa next in line at over a tenth. 

For investors, a highly uncertain economic outlook including elevated inflation, squeezed consumer incomes, and heightened geopolitical tensions all now provide grounds for caution. A hike too far in interest rates could push the US economy into recession, increasing potential future bad debt provisions, while ongoing management caution leaves the share buyback programme halted. 

More favourably, rising interest rates can be beneficial for banks, increasing their ability to widen the margin between deposit and lending rates. The benefits of a diversified business model covering both traditional and investment banking continue to warrant consideration. So does a historic and estimated future dividend yield of around 3.5%. 

On balance, and while reasons for caution persist, JP Morgan remains something of a long-term play on the world’s largest economy.  

Positives: 

• Business diversity
• Investing in technology

Negatives:

• Economic outlook uncertainty
• Rising staff costs

The average rating of stock market analysts:

Buy