Company Insights: Huge Q4 Beat, But Is The Rally Over?

| About: JPMorgan Chase (JPM)
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Summary

Large Q4 beat driven by increased trading revenues post elections.

Loan growth continues to show good momentum.

Forward guidance was cautious but current share price doesn't leave much room for appreciation.

J.P. Morgan (NYSE:JPM) had a huge fourth quarter as the bank earned $6.71B, which translates to $1.71. How big was the quarter? To put it into perspective, the Wall Street consensus was $1.42/share. Even after stripping out the one-off items, which further boosted the earnings, the bank earned $1.53 - comfortably ahead of the estimates.

So what drove the bank's earnings?

  • The single biggest driver of earnings this quarter was JP Morgan's trading business. Fixed income trading was up 31% and equities were up a respectable 8%. Furthermore, reserve releases of $400M and a $475M tax benefit also helped.
  • Outside of the capital markets division, the firm continues to show impressive core loan growth. Core average loans were up 12% yoy and this part of the business remains best in class.
  • On the investment banking side, revenues were up 1%, but a vast portion of the increase is driven by the aforementioned trading results. Advisory fees were down 17% and ECM was down 5% on a yoy basis.
  • Asset management revenues by 1% on a quarterly basis but the AUM remained flat. As expected, the fixed income side of the business is experiencing outflows ($21B) more than offset by inflows into the equities ($35B).
  • The company has been focused on maintaining efficiency in its operations and to that effect expenses stayed flat at $13.6B on a yoy basis, which translates to a 56% efficiency ratio for the bank and slightly ahead of its 55% long-term range.

Guidance:

The company provided a rather cautious forward looking guidance. Firm wide interest income is expected to be up slightly. Revenues for the asset management business in Q1 are expected to be a shade under $3B versus $3.1B in Q4. Commercial banking expenses are expected to be in the $775M range.

Investment conclusions:

The steepening yield curve will benefit JPM along with all other banks in the future. However, the shares of JPM have appreciated over 26% since the end of October. The expected benefits (increased stimulus, lower taxes and increasing capital investments) of the Trump presidency have been heavily discounted into the share price already along with other bank stocks. As the chart below shows, virtually all of the growth in the JPM stock has been driven by multiple expansion over the past six months.

These multiples are based on earnings estimate so they aren't backward looking but forward looking. A 50% increase in the P/E multiple for the bank is a rather robust move.

The market reaction to JP Morgan's big quarter was telling as the stock ended the day flat. The huge trading results which powered this quarter can be viewed as a one-off, and not sustainable. The core business growth while solid, has not shifted materially and remains priced in.

While the bank's CET capital ratio of 12.2% goes to show the robustness of the bank's balance sheet, the expectations have gotten ahead of the fundamentals. For this reason, while I am a fan of JPM over the longer term, I would be prudently taking profits here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.