Investors are still generally skeptical about the earnings growth prospects for banks at this point in the cycle, and JPMorgan's (JPM) rare miss for the fourth quarter didn't help. I wasn't that concerned about the miss at the time, and with first quarter results coming in ahead of expectations despite somewhat weak lending, I'm still not all that concerned about JPMorgan's performance and prospects. While a broader slowdown in the U.S. economy would, of course, create new headwinds, and I do believe the bank sector is past the peak in terms of metrics like credit quality, these shares still look undervalued and have appeal as a longer-term core holding.
That's More Like It - A Return To Beating Expectations
After a modest miss in the fourth quarter, JPMorgan returned to its multiyear pattern of beating expectations, as first quarter core earnings came in 13% ($0.30/share) better than expected. Management didn't meaningfully upgrade guidance, however, and, instead, basically, reiterated the guidance from the Investor Day.
Revenue drove a lot of the beat, as JPMorgan came in about 3% better than expected, with both net interest income and fees both beating expectations, with a stronger beat on the fee side.
Revenue rose 6% yoy by my calculations (analysts take differing approaches to what to include/exclude among various items) and 11% sequentially. Net interest income rose 8% (1% sequentially), largely on the back of earning asset growth (up 5% and 2%). Reported net interest margin was up 8bp yoy and up 2bp qoq, while core (ex-CIB) net interest margin was up 8bp qoq - a number that will likely stand out as pretty strong this quarter if the initial results of peers/rivals like Wells Fargo (WFC) and PNC (PNC) prove typical. Fee income rose 3% (and 22% qoq), with a big sequential jump in trading revenue after a soft fourth quarter.
In terms of business units, the consumer and commercial banks both did quite well, with revenue growth of 9% and 8%, respectively. Card volume continues to be quite healthy (sales volume up 10%), and merchant processing volume was likewise quite strong. Commercial lending growth wasn't all that impressive next to PNC (down 3% qoq, with middle-market down about 1%), nor next to large banks in general, with Fed data showing about 1% qoq growth overall for "large banks" in the first quarter. I think it's too early to really worry about JPMorgan's C&I lending business, but I would keep an eye on it, as this is an important organic growth platform, but also an area where many of JPMorgan's rivals (including PNC) are looking to drive their own growth.
Expense growth was well-controlled, with expenses up 2% yoy and about 1% less than expected. Pre-provision profits rose about 10% yoy, a strong number for this point in the cycle. Tangible book value per share rose 7% yoy, and JPMorgan reported a 19% ROTCE - meaningfully above the 17% long-term target.
Loans Mixed And Deposit And Credit Costs Trending Up
I don't believe there's any one "right" way to analyze certain bank metrics like loan growth; while I traditionally prefer to use end-of-period data, many use average balances. I mention this mostly because there was a larger deviation than normal this quarter, as JPMorgan posted about 2% yoy growth (and 3% qoq contraction) in end-of-period loans, but 4% and 1% growth on an average basis. On an average core basis (excluding the investment banking business), loans were up 5% yoy and flat sequentially, with 4% growth in Consumer and 2% growth in Commercial. I think the average numbers are likely more indicative of what's really going on now, but I would note that the Fed data has been pointing to softening trends in retail lending (mortgages, cards, and consumer loans).
Deposit costs continue to rise, with interest-bearing deposit costs up another 8bp in the quarter, but still outperforming Wells Fargo and PNC a bit. Loan yields continue to be quite healthy (up 15bp to 5.41%) - a little better than what Wells Fargo and PNC reported. Due in large part to shrinking non-interest-bearing deposit balances (down 3% qoq), deposit beta is still rising for JPMorgan, as with almost all other banks, though it is likely to remain on the low end for its peer group exiting this quarter.
Provisions were basically consistent with the prior quarter as percentage of loans, and the NPA and NCO ratios were up only slightly. Although credit has stopped getting better for JPMorgan and credit costs are still well under control, there's likely to be some further erosion from here as the cycle plays out.
Although JPMorgan beat first quarter expectations by a comfortable amount, I'm choosing to be a little slow in boosting my modeling assumptions by a similar amount - I think management is probably being at least a touch conservative with guidance, but I'm more bearish on the U.S. economy than what seems to be the consensus, so I think caution is okay.
I have boosted by 2019 EPS assumption by about $0.08 (around 1%), but my five-year and 10-year adjusted earnings growth rates (NOT EPS growth rates) are basically unchanged (around 4% and 2.5%, respectively). Discounted back, earnings still support a fair value above $120, as does the company's ROTCE.
The Bottom Line
I continue to believe that this is a tougher spot in the cycle for larger bank stocks - the economy is deep into its expansion, and I think economic growth is likely to slow more noticeably as 2019 rolls on. That's not great for banks, but I think JPMorgan is built to do well across the full cycle, and this is still a bank stock I'm very happy to own. There are some cheaper options out there, but in a quality/reward matrix, JPMorgan still scores very well.
Disclosure: I am/we are 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.