ii view: JP Morgan profits impress, but shares tumble

Outperforming over the last month and with lending activity growing. We assess prospects.

Fourth-quarter results to the 31 December 

• Revenue up 1% $30.35 billion
• Net income down 14% to $10.4 billion
• Earnings per share down 12% to $3.33

Chief executive Jamie Dimon said:

“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks. Credit continues to be healthy with exceptionally low net charge-offs, and we remain optimistic on U.S. economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth.”

ii round-up:

US banking giant JP Morgan (NYSE:JPM) today reported fourth-quarter earnings which beat analyst estimates. It also returned more cash from previously set aside bad debt pandemic provisions while also benefitting from fees in relation to strong IPO and M&A activity.

Credit reserve releases of $1.8 billion fed into quarterly earnings per share of $3.33, ahead of analyst estimates for nearer to $3 per share. Investment Banking revenue rose 28% to $3.2 billion, aided by a 37% jump in fees.

But JP Morgan shares fell by more than 5% in early US trading, having more than doubled since market lows in March 2020. Its shares had risen by around 6% in the month prior to these results, outperforming a fall of close to 3% for the tech heavy interest rate sensitive Nasdaq Composite index. Investors have favoured bank stocks because of the positive correlation with higher interest rates, which are expected in 2022 following minutes from the US central bank's December meeting suggesting earlier and faster rate rises.

Within JPM's Corporate and Investment Banking division, fixed income market related revenue fell 16%, hindered by a challenging trading environment for interest rates. Equity Market related revenues retreated by 2%, not helped by derivative trading. Costs for the division rose 18%, driven higher by increased staff compensation and raised legal expenses.

At the bank’s more traditional banking business, a pick-up in lending activity resulted in average loans rising by 6%. Combined debit and credit card spending climbed 26%. Auto loans stayed elevated rising by 7%. Costs however also rose, gaining 11%, again largely due to higher wages. 

Assets under management for its wealth division rose 15% to $3.1 trillion, helped by higher markets and net fund inflows.

The New York headquartered bank previously declared a fourth-quarter dividend of $1 per share, in line with the previous quarter. It also bought back $1.9 billion of its own stock over the period, down from $5 billion in the third quarter. 

ii view:

JP Morgan operates across both traditional consumer and corporate banking, along with investment banking and asset management. North America generates around three quarters of its revenues, leaving it as something of a bellwether for the US economy, followed by Europe, the Middle East and Africa at around 15% and Asia most of the balance. 

For investors, an inevitable hike in US interest rates has overshadowed fixed income trading this latest quarter. Higher rates and therefore higher bond yields mean lower bond prices. Elevated inflation also looks to be playing into higher costs for the bank itself, while stretched US government finances and an ongoing political war over borrowing could eventually result in tax increases.

On the upside, early and heavy bad-debt provisioning during the pandemic continues to be rewarded, as customers have suffered less than expected. The benefits of a diversified business model covering both traditional and investment banking remain evident too. A forecast dividend yield of around 2.3% is also not derisory in the current ultra-low-rate environment. In all, and while economic outlook uncertainty should not be overlooked, clear exposure to the US economy and a robust balance sheet leave this bank as one to own for many long-term global investors.  

Positives: 

• Business diversity
• Investing in technology

Negatives:

• Economic outlook uncertainty
• Rising staff costs

The average rating of stock market analysts:

Buy