JPMorgan Chase & Co. (JPM) is scheduled to release its second-quarter 2014 results tomorrow, Jul 15, before the opening bell. Pessimism over the banking giant’s earnings performance is quite obvious this time around with the prevailing tough industry backdrop, seasonality and clear indication of a significant decline in capital market revenues.
With Wells Fargo & Co. (WFC) being the first bank to report, for a change, the weakness in the broader industry is confirmed beforehand. This further lessens too much expectation from JPMorgan, as it has endured the same industry challenges. A few catalysts, on the other hand, might offset the negatives to some extent.
In the first quarter, JPMorgan failed to override the tough banking backdrop and delivered a negative earnings surprise of 9.2%. Earnings per share came in at $1.28, missing the Zacks Consensus Estimate of $1.41. While its cost containment efforts were reflected in the non-interest expenses, pressure on top line and a higher-than-expected provision dominated.
Will JPMorgan fail to prove its underlying strength this time too? Let’s see what factors might have sketched the Q2 earnings report.
How Things Have Shaped Up?
The first thing to keep in mind is JPMorgan’s disclosure about the expected decline in capital market revenues of as much as 20% year over year. This guidance stemmed from the expected negative impact of the continued downtrend in fixed income, currency and commodities trading on the sizable capital market operations of the company. (Read: JPMorgan to Witness 20% Drop in Q2 Market Revs)
In addition to the soft trading volumes, dreary client activities, high legal costs and slowdown in reserve release should dominate the bank’s Q2 results. Sluggishness in mortgage banking activities should also be reflected in the top line. But investment banking should bring some breather thanks to heightened M&A activities and IPOs during the quarter.
The company has heavily focused on streamlining its operations. Dumping unprofitable businesses and concentrating on those with strong potential should be of some help.
Another defensive action – workforce reduction – has been the bank’s key instrument for some time to stay afloat. The company has plans to lay off 8,000 workers (about 3% of its total workforce) in its consumer and mortgage banking segments by the end of this year. Also, JPMorgan is seeking avenues to slash wasteful expenditure. But no major action was taken on that front during the second quarter, so a significant reflection is not expected in the upcoming release.
While we expect expenses to have remained under control for the quarter, this might not be enough to make up for the shortfall that the company is expected to witness on the top line. In addition to the new set of challenges, a dearth of significant loan growth and pressure on net interest margins from the prolonged low rate environment were there to hurt the top line.
Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company’s highly sensitive financials forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down by 0.8% to $1.30 per share over the last 7 days, as the tendency for a downward estimate revision was more obvious.
Earnings Whispers
Our proven model does not conclusively show that JPMorgan is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for JPMorgan is -1.54%. This is because the Most Accurate estimate stands at $1.28 while the Zacks Consensus Estimate is higher at $1.30.
Zacks Rank: JPMorgan’s Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.
Stocks That Warrant a Look
Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.
Fifth Third Bancorp (FITB) has an Earnings ESP of +4.44% and carries a Zacks Rank #3. It is scheduled to report results on Jul 17.
The PNC Financial Services Group, Inc. (PNC) has an Earnings ESP of +0.57% and carries a Zacks Rank #3. It is scheduled to report results on Jul 16.
The Earnings ESP for Commerce Bancshares, Inc. (CBSH) is +1.47% and it carries a Zacks Rank #2 (Buy). The company is expected to release results on Jul 15.
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