The nation’s largest bank posted strong numbers in Q2, led by a significant increase in investment banking revenue.
JPMorgan Chase (NYSE:JPM), the nation’s largest bank, topped earnings and revenue estimates in the second quarter.
Among the first major companies to report earnings each quarter, the bank saw a 22% increase in revenue and a 25% jump in earnings in the quarter, beating estimates on both fronts.
The largest banks are seen as bellwethers for the national economy, so its strong performance represents a good start to the earnings season. But there are some concerns.
Investment banking revenue rises
On the top line, JPMorgan Chase generated $50.2 billion in revenue in Q2, up 22% from the same quarter a year ago and 20% from Q1. This smashed revenue estimates of $42 billion for the quarter.
With regard to profits, the bank posted $18.1 billion in net income, or $6.12 per share, which was 25% higher than the same quarter a year ago and 35% higher than Q1. This also topped estimates, which had JPMorgan Chase at $5.88 per share.
JPMorgan Chase was buoyed by a one-time $7.9 billion gain after it cashed Visa stock as part of an exchange offer. Excluding that windfall, the adjusted net income was $13.1 billion, or $4.40 per share, which fell short of adjusted earnings estimates.
The banking giant’s profits got a big lift from investment banking, which has been stagnant over the past two years due to the high interest rate environment. However, that changed in Q2 as JPMorgan Chase saw investment banking revenue jump 46% year-over-year to $2.5 billion, while investment banking fees rose 50%.
The firm increased its market share in investment banking to 9.5% and generated more fees than anyone else.
Consumer banking struggles
The share price was down on Friday because JPMorgan Chase had softer numbers in its consumer banking division. The segment posted $17.7 billion in revenue, up 3%, but the largest segment, banking and wealth management, saw a 5% revenue drop to $10.4 billion.
The year-over-year decline was driven by lower net interest income on lower deposit balances and deposit margin compression. This shows that high interest rates are continuing to hamper banking profits as net interest income — the income a bank generates on interest on loans after interest on deposits are paid out — was flat at $13.7 billion.
The bank did, however, raise its outlook for net interest income in fiscal 2024 to $91 billion, from $90 billion the previous quarter. This is likely based on an expectation of the Federal Reserve cutting interest rates at least once and potentially twice.
Higher provisions for credit losses
The other drag on earnings was provision for credit losses, which banks must set aside to cover potential credit losses from defaults. When these provisions are higher, it is based on the expectation that there will be more credit losses and often reflects the bank’s view of the economy. In other words, higher provisions could signal a cautious outlook, as CEO Jamie Dimon articulated in the earnings report.
“While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks. The geopolitical situation remains complex and potentially the most dangerous since World War II,” Dimon said.
Dimon added that “there are still multiple inflationary forces in front of us”, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world.
Still a good buy?
The stock price was down about 2% on Friday morning, as the markets weighed the negatives more than the positives.
However, JPMorgan Chase stock remains up about 20% year-to-date (YTD), trading at $204 per share. Analysts have a median price target of $214 per share, so it is expected to see modest gains in the second half.
Even with the concerns, the bank should get some tailwinds from interest rate cuts, which would help both consumer banking and investment banking. Plus, it is quite cheap, with a P/E ratio of just 12, so it still looks like a good buy.
