What to Look For From JPM


Key Takeaways

  • Analysts estimate EPS of $2.70 vs. $4.50 in Q1 FY 2021.
  • Net interest margin is expected to fall YOY, while rising modestly on a sequential basis.
  • Total revenue is expected to fall YOY as the recovery from the pandemic slows.

JPMorgan Chase & Co. (JPM) has posted soaring profits over much of the past year. Earnings have been fueled by several factors, including the release of loan loss reserves built up early in the pandemic, and by a sharp increase in both takeovers and mortgage lending. But JPMorgan’s earnings decline in the last quarter suggests those forces are weakening. Chief Executive Officer (CEO) Jamie Dimon warned recently that inflation and the war in Ukraine are posing major risks to the global economy.

Investors will be watching to see if JPMorgan can reverse its latest profit decline and produce sustained profit growth when it reports earnings on April 13, 2022 for Q1 FY 2022. The outlook from analysts is not great. Analysts expect the bank’s earnings per share (EPS) and revenue to decline year over year (YOY) for the second straight quarter.

Investors will also focus on JPMorgan’s net interest margin, a key metric in the banking industry that reflects the difference between the interest banks earn on their assets and the interest they pay out to depositors and other creditors. The news may be mixed. The bank’s net interest margin is forecast to fall YOY but rise modestly compared to the final quarter of FY 2021.

JPMorgan’s financial growth may hinge heavily on actions by the Federal Reserve. Rising inflation has prompted the Fed to act faster than originally expected in hiking interest rates. Last month, the Fed raised interest rates for the first time since 2018. Fed officials also laid out an aggressive rate hike schedule that could see interest rates rise significantly higher by the end of the year. Since then, the Fed has indicated that it may be even more aggressive with rate hikes.

While rate hikes would help to boost JPMorgan’s net interest margin, many economists believe the economy risks slipping back into recession caused by both the Fed rate hikes and global supply chain disruptions that are accelerating the pace of price increases. The risk of recession, they think, is definitely rising. Even the yield curve has inverted, with the yield on the 2-year Treasury recently rising above the 10-year. The yield curve has inverted prior to every recession.

While the yield curve is not a perfect predictor of recessions—sometimes it inverts and is not followed by a recession—the inversion suggests that investors are increasing their demand for 10-year debt to lock in current interest rates because they believe the Fed will soon be forced to lower interest rates to fight a recession. A recession would hurt JPMorgan’s lending activity and, if followed by lower interest rates, would compress its net interest margin again.

JPMorgan’s shares have underperformed the broader market over the past year. The stock oscillated between outperformance and underperformance through most of the first half of the past year. But it started to underperform in late October 2021 and its underperformance gap with the market has widened considerably. Shares of JPMorgan have provided a total return of -12.6% over the past year, well below the S&P 500’s total return of 6.9%.

Source: TradingView.

JPMorgan Chase Earnings History

JPMorgan reported mixed results in its Q4 FY 2021 earnings report. The company’s EPS beat expectations, but were down 12.2% compared to the year-ago quarter. It was the first earnings decline since the second quarter of FY 2020. Revenue missed expectations, falling 0.3% YOY. It was the first revenue decline since the second quarter of FY 2021. The company said that it reported strong results across its businesses partly due to increased lending activity and in spite of challenges related to the Omicron variant of the coronavirus, inflation, and supply chain issues.

In Q3 FY 2021, JPMorgan beat consensus estimates for both earnings and revenue. EPS rose a healthy 27.7% YOY, but it was the slowest earnings growth since the third quarter of FY 2020. Revenue grew 1.3% compared to the year-ago quarter, a definite improvement from the previous quarter’s YOY decline of 7.9%. The company noted that the economy was strengthening despite the adverse impacts of the Delta variant of the coronavirus and supply chain disruptions during the quarter.

Analysts expect more declines in both JPMorgan’s top and bottom lines in Q4 FY 2021. EPS is expected to fall 39.9% compared to the year-ago quarter, the fastest drop since the second quarter of FY 2020. Revenue is expected to fall 6.2% YOY, marking the second straight quarter of revenue declines. For full-year FY 2022, analysts are currently forecasting EPS to decline 28.5% as annual revenue grows 0.7%. It would be the fastest earnings decline and slowest revenue growth in at least the past five years.

JPMorgan Chase Key Stats
  Estimate for Q1 FY 2022 Q1 FY 2021 Q1 FY 2020
Earnings Per Share ($) 2.70 4.50 0.78
Revenue ($B) 30.3 32.3 28.3
Net Interest Margin (%) 1.66 1.69 2.37

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also be focusing on JPMorgan’s net interest margin. This key metric measures the difference between the income banks generate from credit products like loans and mortgages and the interest they pay to depositors and other creditors. It is analogous to gross margin reported by non-financial companies, which is the difference between sales and cost of goods sold. In extremely low interest rate environments, net interest margins get squeezed as banks lower rates charged to borrowers in order to remain competitive but they are reluctant to push rates they pay to creditors below the lower zero bound. Note that JPMorgan refers to net interest margin as “net yield on interest-earning assets” in its financial materials.

JPMorgan’s net interest margin in FY 2019, before the start of the pandemic, was 2.46%. In the first quarter of FY 2020, the bank posted a net interest margin of 2.37%. But the company’s net interest margin progressively fell throughout the rest of the year as the Fed lowered interest rates to mitigate the economic shock of the pandemic, making it easier for households and businesses to borrow. The bank’s net interest margin continued to slide during the first half of FY 2021, reaching as low as 1.62% in Q2 FY 2021. It remained steady at 1.62% in the third quarter and ticked up slightly to 1.63% in the fourth. Analysts expect JPMorgan’s net interest margin to improve on a sequential basis to 1.66% in Q1 FY 2022. It would still be slightly lower compared to the year-ago quarter. For full-year FY 2022, analysts are currently forecasting a net interest margin of 1.76%, which would be an improvement from the previous year but still significantly below levels reached in the few years prior to the start of the pandemic.



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