JPMorgan Chase (ticker: JPM) is expected to announce robust second-quarter results on Friday, thanks to favorable interest rates. Analysts surveyed by FactSet project a 40% increase in profits, totaling $12.1 billion compared to the same quarter last year. This translates to projected earnings of $3.98 per share.
As the first major bank to report its earnings and the largest bank in the United States by assets, JPMorgan’s performance is closely observed on Wall Street, serving as a barometer for the industry. Over the past year, banks have faced challenges due to a challenging macroeconomic climate. While higher interest rates initially allowed banks to charge more interest on loans, they have now become a liability, increasing funding costs and devaluing bond portfolios.
Despite these headwinds, analysts remain optimistic about JPMorgan’s ability to capitalize on higher rates. A significant portion of the projected growth stems from an expected surge in net interest income to $21.2 billion, compared to $15.2 billion last year. This boost in revenue is anticipated to drive a 27% increase, totaling $39 billion.
Interestingly, JPMorgan has weathered the storm that plagued the banking industry last year remarkably well. Its shares have seen an 11% increase since the start of the year, while the SPDR S&P Bank ETF (KBE) has experienced a decline of 15%. Moreover, in May, JPMorgan effectively acquired failing First Republic Bank, enabling it to assume $173 billion in loans and $62 billion in deposits after returning $30 billion in deposits made by JPMorgan and other major banks in March to stabilize the institution. Friday’s earnings announcement will mark the first report since this acquisition took place.
JPMorgan and Other Banks Navigate Troubles, Investors Remain Cautious
Despite the current challenges faced by banks in the industry, JPMorgan has managed to fare relatively well as it attracted a significant number of deposits that sought refuge in the perceived safety of larger banks. On the other hand, smaller banks have had to grapple with the fear of losing deposits and have been forced to offer higher interest rates to prevent mass withdrawal, a situation that severely affected Silicon Valley Bank and First Republic.
Given these circumstances, investors are closely monitoring the net interest margin (NIM) at JPMorgan and other banks. NIM refers to the difference between the interest earned on loans and the interest paid to depositors. While NIMs were expanding when banks could charge higher interest rates on loans, they now face increasing pressure to raise interest payments, causing NIMs to stabilize or possibly decline.
Despite the headwinds in the industry, JPMorgan is expected to demonstrate revenue and profit growth. However, investors are particularly interested in the bank’s assessment of the overall economy. Concerns about a potential recession have weighed on the markets this year, especially as investors evaluate the impact of the Federal Reserve’s rate hikes aimed at curbing inflation.
To shed light on its financial performance, JPMorgan is anticipated to report a doubling of net charge-offs compared to the previous year. Additionally, it is expected to allocate $1.2 billion to reserves for troubled loans, a significant increase from $428 million in the prior year. In a recent interview with The Economist, JPMorgan’s chief executive, Jamie Dimon, acknowledged the possibility of a recession in the United States within the next six months. However, he expressed uncertainty about whether its impact would be mild or severe.
Notably, Citigroup (C) and Wells Fargo are also releasing their earnings reports on Friday. Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS) are scheduled to announce their second-quarter results next week.
Written by Carleton English.
