Brexit 'Fireworks' Fuel Surge in JPMorgan's Trading Revenue
This article, originally published at 7 a.m. on Thursday, July 14, 2016, has been updated throughout with comments from bank executives.
Britain's vote to exit the European Union, which roiled markets and darkened the outlook for global economic growth, appears to have been a godsend for trading revenue at JPMorgan Chase (JPM) - Get Report
The largest U.S. bank reported a 23% surge in the business during the second quarter, to $5.6 billion, driven by heavy client demand in government bonds, currencies and emerging markets. As recently as June 1, executives had told investors that they expected a revenue increase in the "mid-teens," an indication of how starkly the final month impacted the overall period's results. Analysts at Deutsche Bank had projected JPMorgan's trading revenue would climb by just 11%.
The bank also posted strong growth in mortgage banking, a business where analysts are expecting a refinancing boom after the so-called Brexit vote on June 23 sent long-term interest rates tumbling.
British voters' decision "triggered a spike in volatility," JPMorgan CFO Marianne Lake said during a conference call with analysts and investors. "Volumes were materially higher in the immediate aftermath." There was also an uptick in transactions in the weeks before the vote, as investors bet that the British would vote to remain, she said, and a typical summer drop in volume didn't happen this year.
Credit Suisse analyst Susan Roth Katzke had described the flurry of trading post-Brexit as "fireworks at the finish." Some analysts, though, had worried that certain banks might have been improperly positioned going into the vote, which sent the pound to its biggest one-day loss on record.
The trading gains helped JPMorgan's total profit of $1.55 beat the $1.43 average of estimates in a Bloomberg survey of analysts, even as net income slipped 1% to $6.2 billion. Total revenue climbed 3% to $25.2 billion, beating projections of $24.5 billion.
JPMorgan is the first of the largest U.S. banks to report earnings, and its performance may signal how the others performed as oil prices rallied after the first quarter and corporate dealmaking gained momentum. Wells Fargo (WFC) - Get Report and Citigroup (C) - Get Report report tomorrow.
While analysts have said the investment-banking business is seeing signs of a pickup following a drought in corporate mergers and initial public offerings, that didn't come soon enough to rescue the quarter at JPMorgan. The bank said revenue in the division tumbled 10% from a year earlier, mostly due to a slump in stock-underwriting fees.
JPMorgan rose 2% to $64.43 on Thursday, making it the second-highest gain on the Dow Jones Industrial Average. The stock previously fell 4% this year to $63.16, a better performance than the broader KBW Bank Index.
"JPMorgan's quarter was excellent," said TheStreet's Jim Cramer, who holds Citigroup and Wells Fargo shares in his Action Alerts PLUS charitable trust portfolio. "I didn't know they could make so much money in this environment."
Still unclear is how Britain leaving the European Union could affect JPMorgan's business going forward. While most investors see the vote as an overall negative, since uncertainty over the future of Europe could keep interest rates low for years and squeeze banks' lending margins, analysts including Dick Bove at Rafferty Capital Markets have insisted that lenders should be able to thrive.
Like its rivals, JPMorgan's interest income has been curbed by nearly eight years of low interest rates as economic concerns hinder potential increases by the U.S. Federal Reserve. The central bank cut rates to nearly zero during the 2008 financial crisis and kept them there until December, when the monetary policy committee approved a 25 basis-point hike.
The Fed still projects it may raise interest rates twice this year, though futures markets have largely discounted the prospect of any increases. Further hikes would be a boon to banks, which are typically able to pass higher rates along to borrowers more quickly than to depositors.
JPMorgan's net interest income, for instance, climbed 6% from a year earlier to $11.7 billion in the second quarter, reflecting growth in core lending and slightly higher rates.
EXCLUSIVE LOOK INSIDE: Wells Fargo and Citigroup are holdings in Jim Cramer's Action Alerts PLUS charitable trust portfolio. Want to be alerted before he buys or sellsthe stocks? Learn more now.
Last month, the New York bank won approval during the Federal Reserve's annual stress tests to buy back $10.6 billion of its shares through June 2017, after $2.6 billion of repurchases in the past three months.
All of the biggest U.S. banks passed this year's review, which measured their capital strength during a hypothetical recession with negative interest rates and unemployment of 10%, though Morgan Stanley's (MS) - Get Report approval was conditional.
JPMorgan, which raised its quarterly dividend to 48 cents a share in mid-May, remains optimistic about the U.S. economy amid growth in mortgages, auto loans and credit cards, Lake said. Executives will take a patient approach to the fallout from the Brexit vote, she added.
Before the vote, CEO Jamie Dimon had warned that a decision to break away could affect as much as 25% of its 16,000-strong workforce in the country.
Much depends on the U.K.'s negotiations to retain so-called passporting privileges, which give banks in any member of the European Union the right to conduct business throughout the region without obtaining a separate license in each country. That policy and London's history as a banking hub had fueled its emergence as a global financial center.
"We continue to work on plans for the full range of outcomes," Lake said on a call with reporters, noting that negotiations are likely to take years. "We'd like to believe that we can continue to have our European franchise headquartered in London, and that London would be a strong financial center. That would be our preference, but it's too early to say."
While JPMorgan and Citigroup both have operations in the region, upheaval related to the departure of the U.K. is likely to affect many other banks as well, said Erik Oja, an analyst with S&P Global. The country is Europe's second-largest economy.
"My focus is on the rest of the European Union, which faces a banking crisis from Greece and Italy, and without the U.K. contributing, the European Union will be much harder pressed to address the serious issues that they have," Oja said in a telephone interview before the report. "Everybody's at risk including the ones that don't do business there because credit issues always have a way of migrating."
JPMorgan remains committed to helping its European customers "operate in this environment," Dimon said on the call with reporters. "We'll continue to serve clients consistently, like we did in 2008 and 2009."