JPMorgan Second Quarter Earnings Jumped By 31%

Jul.12.13 | About: JPMorgan Chase (JPM)

JPMorgan Chase & Co (NYSE:JPM), the largest U.S. bank by assets reported Q2 earnings which rose 31% to $6.50 billion. Earnings per share rose by 32% to $1.60, which is much higher than analysts' estimates of $1.44. This is the sixth consecutive quarter where the bank had beaten the consensus analysts forecast for EPS.

Chairman and CEO Jamie Dimon, cautions on the slow loan growth despite the strong quarter:

"Our earnings reflected strong performance across our businesses. Loan growth across the industry continued to be soft, reflecting a cautious stance by consumers, many small businesses and corporations. However, we continue to see broad-based signs that the U.S. economy is improving and we are hopeful that, as jobs are added and confidence builds, the U.S. economy will strengthen over time."

However, for the corresponding quarter for the prior year, JPMorgan had booked a $4.4 billion loss from the synthetic credit portfolio that the CIO held, or commonly referred to as the "London Whale." The bank had also benefited from a number of one-off gains, including the $355 million from debit valuation adjustments ("DVA"), as the banks' credit spreads widened. The gain from DVA has fallen from $755 million for the period last year; and it is expected to become less substantial in the near future.

Net charge-offs have continued to decline to $1.5 billion from $1.7 billion in the previous quarter, and $2.3 billion in the prior year. Strong credit quality resulted in a $1.5 billion pretax benefit from reduced loan loss reserves, accounting for a $0.25 benefit to EPS for the current quarter. We should continue to see continued reserve releases, as delinquencies are expected to continue to decline. On the other hand, the bank also suffered from a $600 million pretax expense as litigation reserves rose from its corporate division.

Quarterly revenue history & consensus estimates

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Revenue ($ bn)

25.958

25.848

24.378

25.863

22.892

Consensus estimate ($ bn)

24.838

25.872

24.416

24.531

21.791

Surprise

4.5 %

-0.1 %

-0.2 %

5.4 %

5.1 %

Click to enlarge

Source: JPMorgan's earnings release and Thomson Reuters I/B/E/S

Quarterly earnings history & consensus estimates

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

EPS ($)

1.60

1.59

1.39

1.51

1.09

Consensus estimate ($)

1.44

1.39

1.17

1.24

0.73

Surprise

11.1%

14.4 %

18.8 %

21.8 %

49.3 %

Click to enlarge

Source: JPMorgan's earnings release and Thomson Reuters I/B/E/S

Net interest income remains weak

Total net interest income declined by 7% over the previous year to $10.7 billion. This was caused by continuing declines in net interest margins; and stands at 2.20% for Q2, down significantly from 2.37% in Q1. This was primarily the result of an increase in the cash balance and lower yields on loans and investment securities. It is likely for net interest margins to remain low, but management expects NIM to be stable for the rest of 2013, and for net interest income to rise modestly for the Q3 as a result of increased assets.

Mortgage originations were $49.0 billion, which is although 12% higher than the previous year, is 7% lower than in the first quarter. It appears after that mortgage originations are starting to soften, as refinancing has slowed rapidly in recent quarters. With higher mortgage rates, refinancing may continue to decline, and this would hurt Mortgage Production revenues. Purchase originations, have however, increased by 50% over the previous year, or 44% over the previous quarter.

Fixed income and equity trading revenue fell 11.8% from the previous quarter, but concerns over the Fed 'tapering' asset purchases have had a detrimental impact to trading revenue. Nonetheless, revenue rose by 18% over the prior year to $5.4 billion. Investment banking fees were particularly strong, and rose by 38% to $1.7 billion. This was primarily driven by particularly strong debt and equity underwriting.

The bank's balance sheet continues to strengthen, as the bank added $3.7 billion in Tier 1 common capital; and it estimates its Basel III Tier 1 common equity ratio would stand at 9.3%, up from 8.9% in the previous quarter.

Valuation remains reasonable

Although, net interest income will continue to be depressed with falling net interest margins and slow loan growth, the U.S. economy is broadly recovering, and consumer confidence will continue to improve. JPMorgan's valuation remains reasonable, as the bank trades at a P/E TTM ratio of 9.1, and at a P/B ratio of 1.05. Dividend for the second quarter increased to $0.38 from $0.30 in the previous quarter; and there is scope for further improvement. At the time of writing, in pre-market trading JPM stock rose slightly, by 20 cents to $55.34.

Disclosure: I am long JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.