Trading, Loans to Aid JPMorgan (JPM) Q1 Earnings, IB to Hurt

HASfter witnessing the gradual normalization of trading activities over the past few quarters, markets revenues are expected to have been a surprise bright spot for JPMorgan JPM in the first quarter of 2022. Thus, markets revenues (constituting nearly 20% of the company’s total revenues) might offer some support to its results, scheduled to be announced tomorrow, before the opening bell.

The first quarter began with the expectations of trading volumes declining to levels seen during the pre-pandemic era, following an exceptional performance during the last two years. Yet, the ongoing Russia-Ukraine conflict and prospects of multiple and bigger rate hikes by the Federal Reserve to tame red-hot inflation led to an increase in client activity and trading volume in the last month of the quarter.

These developments have led to a heightened level of volatility in both equity markets and bond trading. Hence, JPMorgan is likely to have recorded a decent improvement in markets revenues this time.

The Zacks Consensus Estimate for equity markets revenues of $2.43 billion suggests a jump of 24.1% from the prior quarter’s reported number. The consensus estimate for fixed income trading revenues of $4.71 billion indicates a surge of 41.4%.

Other Factors at Play

Investment Banking (IB) Fees: After an extraordinary performance for almost two years, deal-making came to a grinding halt in March. The ongoing Russia-Ukraine conflict (leading to choppiness in the equity markets worldwide) and ambiguity over the economic slowdown tied to inflation weighed on business sentiments. Thus, both deal volume and total value witnessed a decline during the first quarter. Nevertheless, JPMorgan’s leadership in the space is likely to have offered some support to advisory fees.

Given the above-mentioned concerns, equity market performance was disappointing and thus, the IPOs and follow-up equity issuances dried up. On the other hand, bond issuances are likely to have been decent. JPMorgan’s underwriting fees (accounting for almost 60% of total IB fees) are expected to have been hurt during the March quarter.

The Zacks Consensus Estimate for IB revenues of $2.79 billion indicates a 13% decrease from the prior quarter’s reported number.

Loan Demand & Net Interest Income (NII): Lending activities continued to improve in the to-be-reported quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans accelerated in January and February. Also, as the central bank raised interest rates by 25 basis points in mid-March, this is likely to have had some positive impact on net interest margin (NIM) and NII.

Yet, the first quarter is usually slow for loan originations, which along with the flattening of the yield curve (the difference between short and long-term interest rates), is likely to have hindered JPMorgan’s NIM. Further, fewer days in the quarter are likely to have hurt NII.

The Zacks Consensus Estimate for NII of $13.4 billion suggests a 1.2% decline on a sequential basis.

Mortgage Banking Fees: Since the beginning of the year, there have been heightened speculations that the Fed will raise rates in March (as it happened). As such, there was a rush for mortgage originations and refinancing activities in the early part of the to-be reported quarter.

On the whole, mortgage rates increased sequentially and likewise, mortgage origination and refinancing activities are expected to have decreased drastically. These factors are likely to have weighed on JPMorgan’s mortgage banking income to some extent.

The consensus estimate for mortgage fees and related income of $409 million suggests an increase of 29.8% from the prior quarter’s reported number.

Expenses: JPMorgan’s plan of entering new markets by opening branches, which is already on track, along with inorganic expansion efforts, is likely to have resulted in an increase in operating expenses during the first quarter. Investment in technology to strengthen digital offerings might have led to a rise in costs in the to-be-reported quarter.

Asset Quality: Throughout 2021, JPMorgan continued to release reserves that it had taken to cover losses from the effects of the coronavirus pandemic. This hugely supported the company’s earnings. However, with the majority of releases done last year, reserve releases are not expected to be of much support to the company’s earnings in the to-be-reported quarter.

The Zacks Consensus Estimate for allowance for loan losses of $16.39 billion is relatively stable on a sequential basis. Similarly, the consensus estimate for non-performing assets of $8.35 billion remains unchanged sequentially. The consensus estimate for non-performing loans of $7.69 suggests a 1.4% fall.

What the Zacks Model Unveils

Our proven model does not predict an earnings beat for JPMorgan this time around. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

ESP Earnings: The Earnings ESP for JPMorgan is -0.59%.

Zacks Rank: It currently carries a Zacks Rank #3.

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. Price and EPS Surprise

JPMorgan Chase & Co. price-eps-surprise | JPMorgan Chase & Co. Quote

The Zacks Consensus Estimate for first-quarter earnings has been revised 2.2% lower to $2.73 over the past seven days. The estimated figure reflects a decline of 39.3% from the year-ago reported number. The consensus estimate for sales of $30.46 billion suggests a 5.6% year-over-year fall.

Banks to Consider

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for First Republic Bank FRC is +0.59% and it carries a Zacks Rank #3, at present. The company is slated to report first-quarter 2022 results on Apr 13.

Over the past 30 days, FRC’s Zacks Consensus Estimate for quarterly earnings has moved slightly upward.

State Street STT is scheduled to release first-quarter 2022 earnings on Apr 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.97%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

STT’s quarterly earnings estimates have moved 2.1% upward over the past month.

Bancshares Trading CBSH is slated to announce first-quarter 2022 results on Apr 19. The company currently carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +6.01%.

CBSH’s earnings estimates for the to-be-reported quarter have moved 2.3% north over the 30 days.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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