Trading, loans, higher rates to help JPMorgan’s (JPM) second-quarter earnings

After witnessing the gradual normalization of business activities since the second half of 2021, the same should have been a beacon of hope for JP Morgan JPM in the second quarter of 2022 as well. So earnings from the markets (which make up nearly 20% of the company’s total revenue) might have offered some support to its earnings, which are expected to be announced on July 14, before the opening bell.

Developments in the first quarter of 2022, including Russia’s invasion of Ukraine, continued to disrupt supply chains and create ambiguity across the world. This led to huge market volatility in the second quarter. In addition, fears of an economic slowdown, high inflation and rising interest rates globally led to an increase in client activity and transaction volume during the second trimester.

These factors have led to increased volatility in equity markets and other asset classes, including commodities, bonds and currencies. Thus, JPMorgan is likely to have seen a significant improvement in market earnings this time.

JPM’s market revenues are reported in the Corporate & Investment Bank segment. Zacks’ consensus estimate for total segment net revenue of $12.3 billion indicates a 6.5% decline from the prior year’s level.

Other key factors

Loan Application and Net Interest Income (NII): Lending activity continued to improve in the quarter ahead. According to the latest data from the Fed, demand for commercial and industrial loans, home loans and consumer loans accelerated in April and May.

The Zacks consensus estimate for JPM’s average earning assets is pegged at $3.42 trillion, suggesting a 7.8% year-over-year increase.

In addition, the Federal Reserve raised interest rates by 125 basis points during the quarter. Thus, the key rate reached 1.5-1.75%, the highest level since just before the March 2020 pandemic. Thus, this is likely to have had a favorable impact on the net interest margin ( NIM) and JPM’s NII. However, the flattening of the yield curve in the quarter ended June should have weighed on NIM to some extent.

The Zacks consensus estimate for NII of $15 billion suggests a jump of 17.6%.

Investment Banking (IB) Fees: After an extraordinary performance for nearly two years, closing deals across the globe hit a purple spot. Soaring inflation, the stock market rout and recession fears have taken a toll on corporate sentiment and plans for expansion through acquisitions. Thus, the volume of transactions and the total value collapsed during the second quarter. Additionally, JPMorgan’s leadership in the space is less likely to have offered much advisory fee support.

For similar reasons, IPOs and follow-on stock offerings dried up in the quarter to report. The volume of bond issues also fell. As a result, JPMorgan’s underwriting fees (representing nearly 60% of total IB fees) should have been hit in the June quarter.

The Zacks consensus estimate for IB fees of $2.04 billion indicates a 41.2% drop from the figure reported in the year-ago quarter.

Mortgage bank charges: Year-to-date, there has been heightened speculation that the Fed will aggressively raise rates as has happened. This translated into a substantial rise in mortgage rates during the second quarter, with interest rates on home loans hitting a 14-year high in June.

As a result, mortgage loan origination and refinancing activities fell sharply. These factors likely weighed on JPMorgan’s mortgage banking income.

The consensus estimate for mortgage fees and related income of $412 million reflects a 25.2% decline from the number reported in the prior year quarter.

Expenses: JPMorgan’s plan to enter new markets by opening branches, which is already on track, along with inorganic expansion efforts, likely led to higher operating expenses in the second quarter.

Additionally, investments in technology to bolster digital offerings may have resulted in higher costs in the quarter to report.

Asset quality: With loan balances rising and expectations of an economic slowdown due to geopolitical and macroeconomic concerns, JPMorgan is expected to have built up reserves in the second quarter.

The Zacks consensus estimate for non-performing assets of $8.06 billion implies a 17.8% year-over-year decline. The consensus estimate for non-performing loans of $7.11 suggests a decline of 21.6%.

What the Zacks Model Reveals

Our proven model predicts an earnings beat for JPMorgan this time around. This is because it has the right combination of two key ingredients – a positive win ESP and Zacks rank #3 (Hold) or better – to increase the chances of a win beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: JPMorgan’s earnings ESP is +1.32%.

Zack’s Ranking: He currently wears a Zacks Rank #2 (Buy).

JPMorgan Chase & Co. Price and surprise EPS

JPMorgan Chase & Co. Price and surprise EPS

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

The Zacks consensus estimate for second-quarter earnings has been revised up 1.1% to $2.87 over the past 30 days. Still, the estimated number reflects a 24.1% drop from the number reported a year ago.

On the other hand, the consensus sales estimate of $31.67 billion suggests a 3.9% year-over-year increase.

Other banks worth checking out

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

The ESP on earnings for Financial truist TFC is +1.38% and it carries a Zacks rank of #3, at present. The company is expected to release its second quarter 2022 results on July 19.

Over the past 30 days, TFC’s Zacks consensus estimate for quarterly earnings has remained unchanged.

Associated Bank-Corp ASB is expected to release its second quarter 2022 results on July 21. The company, which currently holds a No. 3 Zacks ranking, has an ESP profit of +1.14%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ASB’s quarterly earnings estimates have held steady over the past month.

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

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Zacks Investment Research

Garland K. Long