An industry setback and a strained global environment held back JPMorgan Chase & Co. JPM from beating the Zacks Consensus Estimate in the third quarter, despite it being pretty conservative after a number of downward revisions lately. The bank came up with adjusted earnings of $1.32 per share, delivering a negative surprise of 4.4%. The bottom line also declined 2.9% from the year-ago earnings of $1.36 per share.
Weak trading activities primarily led to a decline in overall profit for JPMorgan this time around. Revenues from trading fixed income, currencies and commodities fell 23% to $2.93 billion.
Quite naturally, this performance from a positive earnings surprise specialist disappointed investors, resulting in its shares slipping over 1.7% to $60.50 in the in after-hours trading following the results’ release.
Adjusted earnings exclude a one-time tax benefit of $2.2 billion (or 57 cents a share), legal expense of 973 million (or 26 cents a share) and other items. Otherwise, the company has earned $1.68 per share, which is a GAAP number.
Legal expense was much higher than the prior quarter, but that wasn’t crucial in hurting earnings. A slump in revenues mattered the most – investment, consumer and commercial banking businesses in particular witnessed year-over-year revenue declines during the quarter.
Net revenues at the investment banking, community banking and commercial banking units dropped 10% to $8.2 billion, 4% to $10.9 billion and 3% to $1.6 billion, respectively.
Operating expenses and provision for credit losses were down, but not enough to offset the revenue headwind.
The overall performance of its business segments in terms of net income generation was disappointing too. All segments save Consumer & Community Banking and Corporate witnessed a year-over-year decline in net income. The Consumer & Community Banking segment’s net income increased 4%. Corporate & Investment Bank earned 13% lower than the prior-year quarter but maintained its #1 rank in Global Investment Banking fees. Net income for Commercial Banking and Asset Management segments declined 23% and 19%, respectively.
Among the positives, credit card sales volume improved 6% and merchant processing volume grew 11%. Commercial Banking Loan balances increased 13% and Asset Management average loan balances rose 7%. Average deposits for Consumer & Business Banking were up 9% year over year.
Quarter in Detail
Managed net revenue of $23.5 billion in the quarter was down 6% from the year-ago quarter. It also compared unfavorably with the Zacks Consensus Estimate of $23.8 billion. Lesser revenues from Mortgage Banking and Corporate & Investment Bank primarily led to the decline. Net interest income declined 1% from the year-ago quarter to $11.2 billion.
Non-interest expense was $15.4 billion, 3% lower than the year-ago quarter. Though legal expense was higher during the quarter, lower Corporate & Investment Bank expense more than offset it.
Credit Quality
JPMorgan’s credit quality showed significant improvement during the quarter. As of Sep 30, 2015, nonperforming assets were $7.3 billion, down 13% from $8.4 billion a year ago. Net charge-offs decreased 14% year over year to $963 million. As a result, the total retained net charge-off rate, excluding PCI loans, improved to 0.51% from 0.65% a year ago.
Provision for credit losses decreased 10% year over year to $682 million primarily due to lower reserve releases.
Capital Position
JPMorgan’s capital ratios were also impressive. Tier 1 capital ratio (estimated) was 13.2% as of Sep 30, 2015 compared with 12.8% as of Jun 30, 2015. Tier 1 common equity capital ratio (estimated) was 11.5% as of Sep 30, 2015, up from 11.2% as of Jun 30, 2015. Total capital ratio came in at 14.9% (estimated) as of Sep 30, 2015 compared with 14.4% as of Jun 30, 2015.
Book value per share was $59.67 as of Sep 30, 2015 compared with $58.49 as of Jun 30, 2015 and $56.41 as of Sep 30, 2014. Tangible book value per common share came in at $47.36 as of Sep 30, 2015 compared with $46.13 as of Jun 30, 2015 and $44.04 as of Sep 30, 2014.
What Sense Does Q3 Report Make?
A setback in trading activity and low interest rates were expected to hurt the key banking segments this time around and JPMorgan’s numbers are a reflection of that. However, JPMorgan’s underlying strength helped it to brave the palpable weakness to some extent. However, its fundamentals weren’t enough to dodge an earnings miss – even when the estimates were taken down significantly.
Top-line decline can be solely held responsible for JPMorgan’s third-quarter underperformance. Keeping core expenses at check remained the key strength, but that could not stop JPMorgan from showing a bottom-line deterioration.
Among other major banks, Wells Fargo & Company WFC and Bank of America Corp. BAC are scheduled to release before the opening bell today, and Citigroup Inc. C will report on Oct 15. Results of these companies will confirm whether the industry and macroeconomic headwinds have hurt the overall industry.
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