JPMorgan Chase & Co. JPM is scheduled to release first-quarter 2015 results on Apr 14, before the opening bell. It’s difficult to say whether the nation's largest bank has been able to turn things in favor of a fresh start, but the soon-to-release earnings report is expected to look a lot brighter than the last few quarters.
Other than the outflow related to legal settlements and some industry challenges, there was no underlying hitch that might hold back JPMorgan from impressing this time around. In fact, the easing of some nagging industry issues could prove to be a major support to its results.
The headlines that JPMorgan made during the quarter were dominated by favorable indications. If the results are backed by the fundamental changes that the company has made so far, one could assume this as a fresh start.
The concluding quarter of 2014 was quite ugly for the bank with legal charges and industry weakness denting its results. The bank failed to meet investor expectations and delivered a negative earnings surprise of 8.5%. Apart from litigation-related charges, a year-over-over reduction in revenues in each of its operating segments was responsible for the dismal performance.
Let’s see what factors might have shaped the Q1 earnings report.
Likely Factors at Play
Strong bond issuance during the quarter should significantly boost JPMorgan’s capital market revenues.
Its currency trading desk should do better on the back of increased market volatility and foreign exchange rates. Commodities trading is also likely to see improvement, as crude oil price did not hit new lows after mid-January and there were signs of stabilization in some other commodities. So FICC (fixed income, currencies & commodities) should see a decent improvement during the quarter.
While lower M&A deal closures across the globe might slacken the overall growth in investment banking revenues, JPMorgan’s ability to take advantage of the return of volatility in the global financial markets should result in solid growth in advisory fees.
The bank hinted almost after the first two months of the quarter that its trading revenues were higher than what it had generated in the comparable period last year. This should decently add to the overall review growth.
JPMorgan’s key strategy to stay afloat did not fail for quite some time. Keeping expenses in check during the quarter by streamlining operations and reducing workforce should prove to be a bottom-line booster this quarter too.
On the negative side, insignificant loan growth and pressure on net interest margin could curb top-line growth.
No respite from legal charges and restructuring costs are expected this quarter as well. Similar to the last few quarters, the same might have eaten away a significant portion of the company’s profit. According to a Reuters report, the company is on track to pay $4 billion to homeowners by 2017 as part of a legal settlement. It also has to pay $9 billion in cash for a mortgage-related settlement, the source quoted. A portion of this huge legal cost will definitely get reflected this time around.
JPMorgan’s mortgage banking might see weakness due to depressed demand for fresh mortgages and lesser avenues for new originations.
We expect the company to witness a moderate expense decline, but its top line to get a boost. So the negatives are likely to get more than offset this time around.
The revision in analysts’ estimates over the last 7 days also reflect optimism. Consideration of the bank’s key factors has led to an upward revision in the Zacks Consensus Estimate to $1.39 per share.
What Our Model Indicates
Our proven model shows that JPMorgan is likely to beat the Zacks Consensus Estimate in Q1. This is because it has the right combination of the two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings surprise. Here is how JPMorgan is equipped with these matrices:
Zacks ESP: The Earnings ESP for JPMorgan is +0.72%. This is because both the Most Accurate estimate is currently $1.40 while the Zacks Consensus Estimate stands at $1.39.
Zacks Rank: JPMorgan’s Zacks Rank #2 (Buy) also increases the predictive power of ESP.
Stocks That Warrant a Look
Here are a few other 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 +2.70% and carries a Zacks Rank #3. It is scheduled to report results on Apr 21.
With an Earnings ESP of +1.39% and a Zacks Rank of #3, SunTrust Banks, Inc. STI is scheduled to report results on Apr 20.
The Earnings ESP for State Street Corporation STT is +0.95% and it carries a Zacks Rank #3. The company is scheduled to release results on Apr 24.
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