JPMorgan Chase & Co. (JPM) is scheduled to release fourth-quarter 2014 results on Jan 14, before the opening bell. The results are particularly crucial this quarter given the recent calls from critics and analysts to break up the nation's largest bank to enhance its value.
In fact, it is assumed that breaking up would help the bank to address concerns related to the new capital rules. The soon-to-come results would either validate the notion or prove it wrong.
Other than some legal charges and an unsupportive industry backdrop, there was no underlying hitch that could hold back JPMorgan from showing its mettle this time around. Still, pessimism over the banking giant’s Q4 earnings performance is prominent since braving the industry challenges was no mean task.
Similar to the last reported quarter, JPMorgan will kickstart bank earnings along with Wells Fargo & Co. (WFC) this quarter. So there is no clue to how the industry backdrop has stained results. But the headlines that JPMorgan made during the quarter were not impressive enough to be confident about an impressive earnings performance.
In Q3, the industry weaknesses could not stop JPMorgan from proving its bottom-line power and it came out with earnings of $1.62 per share, delivering a positive surprise of 16.6%. However, legal expenses let it actually earn $1.36 per share.
This was possible primarily due to the top-line strength. Further, the expense line showed significant year-over-year improvement on the back of active cost containment efforts.
Will JPMorgan fail to prove its underlying strength this time around? Let’s see what factors might have shaped the Q4 earnings report.
Factors That May Be Reflected in Results
Overall trading volumes remained soft during the quarter, but a pick-up in market volatility in October might have supported JPMorgan’s trading revenues. While the currency trading desk should do better on the back of improved foreign exchange rates, the overall performance of FICC (fixed income, currencies & commodities) trading units remained lukewarm. This should lead to a net decline in capital market revenues.
Moreover, demand for fresh mortgage remained depressed with feeble mortgage activity due to continued uncertainty over interest rates. The rate uncertainty also paired up with stringent regulatory requirements to keep demand for fixed-income securities muted. Also, the impact of weak energy lending due to the oil price slump could be reflected in JPMorgan’s Q4 revenues.
Among other negatives, lackluster client activities and high legal costs linger. In fact, legal costs are expected to remain high this quarter as the outflows included $1 billion for resolving foreign-exchange rate investigations in November.
Further, a slowdown in reserve release could drag the results of JPMorgan.
On the positive side, riding on continued strength in M&A over the quarter, investment banking should give a decent performance. Though underwriting of U.S. banks remained somewhat dormant, JPMorgan did better than many others on that ground.
The company has been focusing heavily on streamlining its operations for quite some time. Dumping unprofitable businesses and concentrating on those with strong potential should bear some fruit this quarter.
Another defensive action – workforce reduction – has been the key instrument in keeping the bank afloat for quite some time. Of course, these efforts will be reflected to some extent in the expense line of the upcoming release.
While we expect the company to witness a moderate expense decline, this might not be enough to make up for the likely shortfall in the top line. In addition to the new set of challenges, insignificant loan growth and pressure on net interest margin could thwart the top line.
Most importantly, JPMorgan failed to impress analysts with its level of activities during the quarter. In fact, too many concerns surrounding the company’s performance led to a significant downward revision in earnings estimates. The Zacks Consensus Estimate for Q4 has been revised about 3% downward over the last 7 days.
What Our Model Indicates
Our proven model does not conclusively show that JPMorgan is likely to beat the Zacks Consensus Estimate in Q4. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for increasing the odds of an earnings surprise. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for JPMorgan is -0.77%. This is because both the Most Accurate estimate is currently $1.29 while the Zacks Consensus Estimate stands 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 couple of 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.
The PNC Financial Services Group (PNC) has an Earnings ESP of +1.15% and carries a Zacks Rank #3. It is scheduled to report results on Jan 16.
The Earnings ESP for Associated Banc-Corp (ASB) is +3.33% and it carries a Zacks Rank #2. The company is scheduled to release results on Jan 22.
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