ii view: JP Morgan enjoys profits boom, but shares drop

This US bank offers both size and diversity, with earnings again beating forecasts. We assess prospects. 

Second-quarter results to the end of June 

• Net revenue down 7% to $31.4 billion
• Net income up 155% to $11.95 billion
• Earnings per share up 174% to $3.78

Chief executive Jamie Dimon said:

“JPMorgan Chase delivered solid performance across our businesses as we generated over $30 billion in revenue while continuing to make significant investments in technology, people and market expansion. 

“In particular, net charge-offs, down 53%, were better than expected, reflecting the increasingly healthy condition of our customers and clients.”

ii round-up:

JPMorgan (NYSE:JPM) today reported forecast-busting results. The US banking giant again returned cash from previously set aside bad debt pandemic provisions while also benefitting from a boom in M&A activity.

So-called credit reserve releases of $3 billion during the quarter helped fuel a 174% jump in earnings per share to $3.78, topping analyst forecasts for just $3.20 per share. Record global investment banking fees of $3.6 billion also fed into the earnings mix, aided by a record $1.5 trillion of global M&A deals during the quarter. 

JP Morgan shares drifted lower in early US trading, having risen by more than 60% over the last year. Shares for banking and markets heavyweight Barclays (LSE:BARC) are up by more than 40% over the last year, while Asia-focused HSBC (LSE:HSBA) is up under 10%.

Total markets related revenue at JP Morgan fell by 30% year-over-year, given buoyant activity in the second quarter of 2020 and sizeable global central bank actions during the pandemic. Bond, or fixed income markets related revenue fell by 44% compared to Q2 2020 to $4.1 billion.  

Assets under management for its wealth management business increased by a fifth to $3 trillion, driven by higher market levels and cumulative net inflows. Net revenue for its home lending business fell by 20% to $1.35 billion, with revenue for its card and autos business staying flat at just over $5 billion.

The New York headquartered bank previously declared a quarterly dividend of 90 US cents per share, unchanged from the prior quarter. The bank also bought back $5.9 billion of its own stock over the period, up from $4.3 billion in the first quarter. Buybacks were previously suspended amid pandemic caution.

ii view:

JP Morgan's operations cover both traditional consumer and corporate banking, along with investment banking and asset management. North America generates around three-quarters of its revenues, leaving the mammoth bank as something of a bellwether for the wider US economy. 

For investors, pandemic outlook uncertainty should not be forgotten, and rises in corporation tax could now help pay for pandemic assistance under the relatively new Biden government. An estimated price-to-net asset value of 1.7 times is also above the 1.5 times three-year average, suggesting the shares are not obviously.

But early and heavy bad debt provisioning and caution under the pandemic is now being rewarded, as customers have suffered less than expected. A diversified business model covering both traditional and investment banking continues to show its value. And shareholder returns following what should prove to be the very worst of the pandemic are back in focus. In all, and given both ongoing investment in technology and a considered robust balance sheet, JP Morgan arguably remains a core US direct equity holding within most already diversified and long-term focused investment portfolios. 

Positives: 

• Business diversity
• Recommenced shareholder returns

Negatives:

• Ongoing pandemic uncertainty
• Lower interest rates are broadly bad for bank profitability

The average rating of stock market analysts:

Buy