JPMorgan Third-Quarter Profit Jumps on Tax Cuts as Trading Fees Fall

JPMorgan Chase & Co. (JPM)  , the largest U.S. bank, said third-quarter profit jumped 24% from a year earlier thanks to President Donald Trump's tax cuts even as revenue in its juggernaut trading business slowed.

Net income rose to $8.38 billion, or $2.34 a share, the New York-based company said Friday, Oct. 12. The result exceeded the $2.26 a share average estimate of 24 analysts in a FactSet survey of 24 analysts.

In the press release, JPMorgan CEO Jamie Dimon noted the increasing uncertainty for the banking business with the impact of Trump's $1.5 trillion of tax cuts expected to fade next year, widening U.S. government budget deficits that have ballooned the national debt past $21 trillion, rising U.S. interest rates and the president's trade conflicts with China, Europe and Japan.

"The U.S. and the global economy continue to show strength, despite increasing economic and geopolitical uncertainties, which at some point in the future may have negative effects on the economy," Dimon said. 

Total revenue climbed by 5% to $27.8 billion, while expenses climbed by 7%, the bank said in a press release.

Trading revenue fell by 2% to $4.4 billion, primarily driven by a drop in fees from bonds, foreign exchange and commodities. Investment-banking revenue, including fees from mergers and stock- and debt-underwriting were flat with the prior year at $1.7 billion.    

For investors, JPMorgan's results underscored that rising U.S. interest rates aren't all they were touted by many analysts to be -- as a pure driver of profit growth that would last for years. 

As the Federal Reserve started raising rates in late 2015, bank stocks rallied on analyst forecasts that lending revenue would swell, due to higher interest on loans and bonds. The stocks rallied further last year on speculation that Trump's tax cuts would stimulate the economy, ushering in an era of fast loan growth. 

But now, competition is heating up for deposits, forcing banks to raise their rates on deposits to keep customers from defecting, while bond- and stock-trading fees are suffering due to lower transaction volumes. Banking-industry loan growth, at 4.6% from a year earlier, isn't significantly outpacing the economy, currently growing at an estimated 3.2% clip, according to FactSet.    

JPMorgan's shares tumbled 5.7% this week through Thursday, even as many investors increased their expectations for Fed rate increases next year.      

Citigroup Inc. (C) and Wells Fargo & Co. (WFC)  are scheduled to report third-quarter earnings later on Friday.

The longtime bank analyst Dick Bove, chief strategist for Rafferty Capital Markets, wrote this week in a report that banks also face losses on their huge portfolios of investment securities, which is where the lenders invest extra deposits they don't need immediately for loans or regular operations. 

When interest rates rise, the prices for those investment securities fall, saddling the banks with big losses. Under current accounting rules, those losses aren't counted in profit statements. The losses do, however, subtract from shareholders' equity. And bank stocks often trade as a multiple of shareholders' equity, also known as book value. 

"We know that the value of these assets are declining as interest rates rise," Bove wrote. "What is unknown is by how much."

JPMorgan has beaten the quarterly estimates for 14 straight quarters, a sign of outperformance by the bank and Dimon -- or perhaps simply a reflection of its investor-relations team's ability to coach analysts to keep their estimates low.

JPMorgan and Citigroup are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells the stocks? Learn more now.

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