Officially launching the Q2 earnings season, moments ago JPMorgan reported strong Q2 earnings which again beat on both the top and bottom line, with adjusted revenue of $28.39BN, beating estimates of $27.34BN (and above the highest sellside estimate of $27.84BN), generating EPS of $2.29, also beating expectations of a $2.22 print, and up 26% Y/Y.
Net income at the bank with $2.6 trillion in assets on its balance sheet rose 18% to $8.3BN, which however was a modest drop from the $8.7BN reported last quarter. At the bottom line level, JPM was quick to note that its Q2 effective tax rate was 21.3%, reflecting the lower income tax rate as a Trump tax reforms.
Broken down by business segment, JPM reported revenue increases across the board:
- Consumer & community banking rose 10% to $12.5BN
- Corporate & investment bank is rose 11% to $9.9BN
- Commercial banking up 21% to $2.3BN
- Asset & wealth management down 4% to $3.5BN
Noninterest expense was $16.0 billion, up 8%, driven by higher compensation expense, investments in technology, auto lease depreciation, volume-related transaction costs, and a loss of $174 million on the liquidation of a legal entity.
Commenting on the big picture earnings, CEO Jamie Dimon said that “we see good global economic growth, particularly in the U.S., where consumer and business sentiment is high. Because of this broad growth and the strong underlying performance across each of our businesses, the company delivered record results this quarter. We also want to acknowledge that global competition is getting stronger.”
The bank also reported a provision for credit losses of $1.21BN in Q2, below the $1.48BN estimated, and virtually unchanged from the $1.215BN recorded one year ago.
At the same time, total charge-offs declined by $200 million to $1.1 billion in the quarter, thanks to a modest sequential decline in souring credit card loans, which dipped from $1.170BN in Q1 to $1.164BN in Q2, which however was still 12% higher Y/Y from $1.037BN. JPM’s charge-off rate in cards dipped from 3.32% to 3.27%, still well above the 3.01% one year ago. According to the company the modest deterioration in card charge offs was more than offset by a net recovery in Home Lending driven by a loan sale.
Also worth noting is that home loans were down by $79 million to $1.34 billion at the consumer bank, while lending at the corporate and investment bank also dropped by $52 million to $321 million, according to the company presentation.
Return on common equity rose by 2% points to 14%, while provisions for credit losses were roughly flat (slightly down) as JPM did not change the amount of reserves in the quarter. Non-interest expense rose about 8% to $15.9 billion, a little higher than analyst expectations, with the biggest rise was in the corporate & investment bank.
Meanwhile, as charge offs moderated, the average loan balances rose 4% from a year ago, slightly less than the 7% increase in core loans that the firm highlights in its earnings material. Meanwhile average deposits rose 5% with JPM reporting that the average interest JPMorgan it paid deposit holders in Q2 rose 10bps on the quarter and 26 bps in the last year, from 0.25% to 0.51%.
As usual, keep a close eye on what other banks reports as credit card chargeoffs as this is a leading indicator of consumer pain.
C&I (commercial and industrial) loans rose 3% q/q and y/y, while CRE (commercial real estate) loans were flat q/q, and up 4% y/y (page 6 of the slides).
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With no material concerns about the bank’s balance sheet, attention was focused on its income statement, and specifically how the bank’s high-margin FICC and sales and trading group performed in a time of declining volatility after last quarter’s blockbuster revenues.
The answer: quite well. In the second quarter, the bank’s all important FICC group generated revenue of $3.45 billion, which while below last quarter’s VIXtermination driven $4.553 billion, solidly beat the estimate of $3.2 billion and was $237MM, or 7%, higher than Q2 2017. A quick read across shows solid results across the rest of the investment bank:
- Q2 Equity Markets revenue of $1.96BN, up 24% Y/Y and beating estimates of $1.70 BN
- Q2 Investment Banking revenue of $1.95BN, up $218MM Y/Y and also beating estimates of $1.76 BN
This meant that overall markets revenue of $5.4B, up 13% YoY, thanks to “good client flows and strength across products.” JPM also highlighted that securities Services revenue of $1.1B, rose 12% YoY, driven by higher interest rates and deposit growth as well as higher asset-based fees from new client activity and higher market levels.
Commenting on the results, Jamie Dimon said that “In the Corporate & Investment Bank we had record Global IB fees for the first half of the year, maintaining our #1 rank year-to-date.”
On the other side of the ledger JPM reported expenses of $5.4B, up 11% YoY, driven by higher performance-related
compensation, volume-related transaction costs and investments in technology.
Meanwhile, JPM also said expenses in Consumer & Community Banking rose 6% versus last year to $6.9b, driven by higher auto lease depreciation and investments in technology
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For those wondering how JPM’s Net interest margin did, it was 2.46%, slightly lower than the 2.48% in the first quarter but still well above last year’s 2.31%. JPM’s success in raising its NIM comes as a result of big banks being able to keep down rates they pay on deposits while charging more on loans as the Fed has slowly hiked short-term rates.
As Dimon noted in his comment on the segment, “Commercial Banking revenue grew 11%, with particular strength in investment banking and treasury services, as well as solid loan growth. Our Asset & Wealth Management business continued to perform well with positive net long-term and liquidity inflows and continued loan growth.”
Finally, in a move that surprised many, unlike last quarter, JPM released a bare-bones presentation which did not even include the company’s outlook for the rest of the year. As Bloomberg notes, analysts will be demanding that outlook picture in the earnings call, and “it could be a sign the short-term future is more clouded with trade tensions.”
Full earnings presentation below (pdf link):
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