JPMorgan Chase (JPM) earnings declined year-over-year but managed to beat Wall Street’s lackluster forecast, helped by a drop in trading revenue that wasn’t as bad as feared. Predictably, JPM stock got goosed by the upside surprise.
Like Citigroup (C) earnings on Monday, JPMorgan was able to exceed low expectations, which were driven by a slowdown in mortgage lending and vapor-thin trading volumes, especially in the lucrative fixed-income market.
Rising interest rates cooled off the refinancing boom more than a year ago — just look at results from mortgage giant Wells Fargo (WFC) for evidence of that. At the same time, trading in everything from equities to fixed income to commodities has hit a prolonged slump, hurt by tougher new financial regulations, a lack of volatility and uncertainty about the future path of interest rates.
As a result, revenues and profits for the biggest banks are under pressure. Happily for JPMorgan earnings and JPM stock, however, the declines in the second quarter weren’t as steep as analysts feared.
For the most recent period, JPMorgan said net income fell 8% to $6.0 billion, or $1.46 per share, from $6.5 billion ($1.60 per share) in the year-ago quarter. Analysts, however, modeled earnings of $1.29 a share, according to Thomson Reuters, and so JPMorgan served up a huge earnings beat.
JPMorgan revenue declined 3% to $24.5 billion, which surpassed Wall Street’s forecast of $23.7 billion.
JPMorgan Earnings: “Not Terrible” Saves the Day
JPMorgan earnings exceeded estimates thanks to a shallower-than-forecast drop in trading revenue. Revenue generated from the JPMorgan fixed-income and equity markets declined 15% year-over-year against expectations for a drop of 20%. Elsewhere in the industry, Citigroup said trading revenue fell 16% vs. a forecast for a plunge of 20% to 25%. Goldman Sachs (GS) on Tuesday said operating profit from trading in fixed income, currencies and commodities decreased 10%.
JPMorgan earnings did show strength in other areas of business. Investment banking fees rose 3%, helped by the upturn in mergers and acquisitions and initial public offerings. The wealth management division also grew smartly, with revenue up 5% on a 15% expansion in client assets.
The better-than-expected JPMorgan earnings results lifted JPM stock sharply in early trading, bringing roughly breakeven for 2014. JPM stock was off 3.7% for the year-to-date heading into the JPMorgan earnings release, hurt by the slowdown in mortgage lending and trading.
Investors are also worrying about the health of JPMorgan CEO Jamie Dimon, who has been diagnosed with cancer of the throat.
The Bottom Line
Either way, JPM stock finds itself in the unusual position of being a market laggard. Indeed, JPM stock is trailing the S&P 500 by seven percentage points so far this year. That has JPM stock looking more like a bargain than a bust — at least for patient investors.
As we said with WFC stock, if you’re bullish on the economy and stock market, you have to be bullish on JPM stock. It’s hard to see either of them enjoying an extended period of growth without JPM stock participating eventually.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.