Why JPMorgan Earnings Failed to Impress Investors

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JPMorgan Chase & Co. (NYSE: JPM) reported second-quarter 2017 results before markets opened Friday morning. The investment bank and financial services giant reported diluted earnings per share (EPS) of $1.82 on revenue of $25.47 billion. In the same period a year ago, Morgan reported EPS of $1.55 on revenue of $24.38 billion. Second-quarter results also compare to the consensus estimates for EPS of $1.58 on revenue of $24.96 billion.

Quarterly profits rose 13% from $6.2 billion in the second quarter of 2016 to $7.03 billion. The bank’s non-interest expenses rose 6% from $13.64 billion to $14.51 billion, which the bank said was due to a legal benefit recorded in the prior-year quarter, higher auto lease depreciation and FDIC-related expenses.

Non-interest revenues rose 2%, driven by a legal settlement, higher banking revenue in the corporate and investment bank division, higher auto lease revenue and higher revenue in asset and wealth management. Provision for credit losses was $1.22 billion, compared with $1.4 billion in the prior-year quarter, due to reserve releases of $241 million in the energy portion of the firm’s wholesale portfolio offset by a $252 million reserve build in the consumer portfolio.

By divisions, net income in the consumer and community banking group dropped 16% to $2.22 billion, commercial banking net income rose 30% to $902 million and asset management group net income rose 20% to $624 million for the quarter.

Corporate and investment banking group net income rose 9% from $2.49 billion to $2.71 billion, even as revenues slipped by 3%. Lending revenue was $373 million, up 35%. Provision for credit losses in the group totaled $53 million, compared to $235 million in the prior-year quarter.

Revenue fell 11% in the bank’s markets and investors services group and fixed income revenues were down 19% as a result of lower revenue in rates, credit, and commodities due to reduced flows driven by “sustained low volatility and tighter credit spreads.”

More lending at higher rates (thanks to the Federal Reserve) boosted net income, but trading revenues fell and the drop in fixed income revenues will weigh on the stock price.

Bank CEO Jamie Dimon said:

We continued to post very solid results against a stable-to improving global economic backdrop. The U.S. consumer remains healthy, evidenced in our strong underlying performance in Consumer & Community Banking. Loans and deposits continue to grow strongly, and card sales and merchant processing volumes were up double digits, reflecting our consistent investment in the business. In the Corporate & Investment Bank, we maintained our leadership in Banking, while Markets revenue was down amid lower volatility and client activity. …

We are also pleased to announce increases to our capital return plans while continuing to invest in our businesses for long-term profitability – reflecting the financial strength of our company and the significant capital and liquidity improvements we have made over the past several years.

Dimon is referring to a previously announced boost in the quarterly dividend from $0.50 to $0.56 per share and a stock buyback program totaling $19.4 billion over the next 12 months.

The bank did not offer guidance in its press release, but the consensus estimates call for third-quarter EPS of $1.67 on revenues of $25.43 billion. The EPS estimate for the 2017 fiscal year is $6.62 on revenues of $101.14 billion.

Shares traded down about 0.3% in Friday’s premarket at $93.00. The current 52-week range is $63.38 to $94.51. The consensus 12-month price target was $95.00 before results were announced.