Trading, Mortgage Banking To Aid JPMorgan (JPM) Q4 Earnings

Rise in client activities seem to have driven JPMorgan’s (NYSE:JPM) trading revenues in fourth-quarter 2019. Trading revenues constitute nearly 20% of the bank’s total revenues and will support its results slated on Jan 14, before market open.

Uncertainty related to the U.S.-China trade war and Brexit, expectations of global economic slowdown, the Federal Reserve’s accommodative stance and a number of happenings in the latter part of the quarter along with strong domestic economy kept trading desks busy.

During an investor conference in December, JPMorgan’s CFO Jennifer Piepszak had stated that trading revenues in the fourth quarter are expected to be up “meaningfully” year over year, with gains largely driven by fixed income operation. In the year-ago quarter, the company’s fixed-income trading revenues were at the lowest levels since the 2008 financial crisis.

Thus, trading revenues are likely to have been robust during the to-be-reported quarter. The Zacks Consensus Estimate for equity trading revenues of $1.38 billion suggests a rise of 5% from the prior-year reported figure. The consensus estimate for fixed income trading revenues indicates increase of 40% year over year to $2.60 billion.

Other Factors at Play

Increase in mortgage banking fees: The Federal Reserve’s accommodative monetary policy and lower mortgage rates during the fourth quarter drove mortgage origination volumes and refinancing activities. These along with rise in demand for residential real estate loans are expected to have supported JPMorgan’s mortgage banking income.

The consensus estimate for mortgage fees and related income of $442 million indicates a significant jump from the prior-year quarter reported number.

Muted growth in investment banking (IB) fees: Though the number of closed deals declined during the fourth quarter, a higher number of announced M&As indicate a strong pipeline. Further, global deal value seems to have shrunken as well. Thus, JPMorgan’s advisory fees are likely to have been negatively impacted.

On the other hand, solid equity markets performance and the central banks’ accommodative stance drove corporates to issue equities across the globe. Moreover, bond issuance volumes were strong, while debt issuances were muted as loan demand was soft. Hence, growth in JPMorgan’s equity underwriting fees and debt origination fees (accounting for almost 60% of total investment banking fees) are expected to have been weak in the fourth quarter.

Further, management expects IB revenues to be flat on a year-over-year basis. In the December conference, Piepszak said, “The quarter has played out a little bit better than we thought largely on healthy investment grade flow given the rate environment. Important to note there that the wallet is shrinking. So staying flat for us year-over-year is the continuation of us taking share in IB fees.”

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The consensus estimate for IB fees of $1.81 billion indicates a slight decline from the prior-year quarter reported number.

Decline in net interest income (NII): During the fourth quarter, the overall lending scenario remained decent except in commercial and industrial. This is likely to have aided JPMorgan’s NII growth to some extent. However, decline in interest rates likely had an adverse impact on NII and net interest margin in the to-be-reported quarter.

With a bit of improvement in the market rate environment, management expects NII to be nearly $14.2 billion, on par with the third-quarter level. Additionally, for 2019, NII is expected to be less than $57.5 billion due to a number of factors, including lower long end rates and expectations of up to three rate cuts this year.

The Zacks Consensus Estimate for NII of $13.9 billion projects 3.3% decline on a year-over-year basis.

Rise in expenses: As JPMorgan’s plan to enter new markets by opening branches is already a work in progress, operating expenses have likely remained on the higher side. Also, increased investment in technology to strengthen digital offerings has probably resulted in a rise in costs in the to-be-reported quarter.

For 2019, the company expects operating expenses to be nearly $65.5 billion, up $2.7 billion from 2018 level. This additional spending includes $600 million of new technology investments and $1.6 billion for marketing, front-office hiring, new branches and a new headquarters building.

Here is what our quantitative model predicts:

Our proven model shows that JPMorgan has the right combination of the two key ingredients — a positive Earnings ESP Filter .

Earnings ESP: The Earnings ESP for JPMorgan is +0.41%.

Zacks Rank: It carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP.