Image Source: Trending Topics 2019
By Matthew Warren
JPMorgan (JPM) reported second-quarter results July 16, with revenue up 4% to 29.6 billion and net income of $2.82 per share ($2.59 excluding a one-time income tax benefit of 23 cents) compared to Wall Street estimates of $2.49 per share. Average total loans were up 2% year over year while deposits grew a healthy 4% on the same basis. Even after distributing $7.5 billion to shareholders in the quarter via dividends and share buybacks, the bank remains extremely well capitalized with a common equity Tier 1 ratio of 12.2%. Despite this robust level of capital, the bank posted a return on tangible common equity of 20% in the quarter, or 18% after adjusting for unusual items.
One cloud on the horizon is net interest margins coming under pressure a bit this quarter, with more expected based on the market’s expectations for perhaps three rate cuts in the future. Management shaved about a half billion off its outlook for FY2019 net interest income as compared to what they were expecting last quarter when the Fed was expected to simply be on hold. Asked whether it would take action on the expense side, management was very clear that they would continue to invest in the business and their efforts to take share. JPMorgan is currently taking market share in credit cards and merchant processing and expect this to continue.
It remains very clear that the Consumer & Community Banking segment is the crown jewel with an ROE of 31% in the quarter with the Asset & Wealth Management not far behind at 27% ROE in the quarter. What is also clear is that even though the Corporate & Investment Bank is one of the best on the Street, the ROE is only 14% sitting here in a benign economic environment, albeit with activity levels off of last year’s stellar results. The market-oriented portions of this business are simply volatile and do not earn that high of a return on capital. This is true across the industry and many banks put up even worse returns on similar businesses. We are not big fans of investment banking and trading and don’t think these businesses deserve to trade at premium multiples. Our fair value estimate of JPMorgan remains unchanged at this time.
Related: XLF
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Matthew Warren does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.