JPMorgan (JPM) - Get Report beat revenue and earnings estimates and showed off the strength of its diversified business in the face of a rough 2020 campaign, but the stock is down and may struggle to gain traction until several macro developments unfold.
The stock fell a bit more than 1% to about $100 a share after earnings Tuesday. It has been trading at roughly 12 times next year’s earnings, slightly high compared to its average valuation in the past several years, leaving minimal room for upside on earnings. Investors have recently moved into investment banks with businesses diversified away from sensitivity to changes in interest rates, as the lending business has become less lucrative and profitable in 2020.
Here were the results against Wall Street’s expectations:
- Revenue: $29.92B v. $28.54B (actual result: -0.2% year-over-year)
- NII: $13.1B (-9%)
- Markets: $6.6B (+30%)
- IB: $840M (+20%)
- Return on Tangible Common Equity:: 19% (+1 ppt)
- Earnings Per Share: $2.92 v. $2.23 (+9%)
- Loan Loss Provisions: $611M (Q2: $10B)
Net interest income was pressured by low interest rates and low loan volumes, but the company was able to beat on estimates, as it often does, on the strength of its secondary businesses. Investors are also likely encouraged to see that the massive cash amount set aside to absorb potential losses on loans dramatically reduced quarter-over-quarter. This confirms the bank is positioning for the continued economic recovery.
Negatively, trading revenues can be volatile and loan loss provisions, while generally moderating over the course of the next year or so, aren’t a sure bet to completely vanish from the picture.
The lending business still remains a significant portion of JPM’s overall business and investors need to see the the outlook for interest rates and loan demand to brighten. Coronavirus vaccines and final stimulus are still question marks, calling into question the continued speed of the economic recovery. Those macro factors, which are largely out of JPM’s control, will be key in moving the stock up significantly.