JPMorgan Misses Q1 Earnings on Macro Issues

Amid the ongoing uncertain economic environment, investors are indecisive about what move to make next. Post-pandemic trends had already begun to positively shift the landscape, but then the Russia-Ukraine conflict and rising inflation have shaken investor confidence in almost all sectors. Banks, which comprise a major part of the broader finance sector, are not unscathed.

Despite indications of rising rates, banking stocks were in murky waters due to several geopolitical factors since the beginning of 2022. The SPDR Financial Select Sector ETF (XLF) and the SPDR S&P Bank ETF (KBE) lost 5.62% and 10.42%, respectively, year-to-date, compared to S&P 500 losses of 7.3%. 

Among other major banks, JPMorgan Chase & Co. (NYSE: JPM) kick-started earnings season with a miss. Shares of JPMorgan declined 3.18% after posting disappointing Q1 2022 earnings. Meanwhile, revenue surpassed expectations. 

Results in Detail 

JPMorgan reported earnings of $2.63 per share, missing analysts’ expectations of $2.72, and declined 41.6% from $4.50 on a year-over-year basis. Net income stood at $8.3 billion, down 42% as the bank recorded a net credit reserve build of $902 million in the quarter, in comparison to a net credit reserve release of $5.2 billion in Q1 2021.  

The reserve build was mainly due to the elevated probability of downside risks on the back of high inflation and the Ukraine-Russia conflict. 

Adjusted revenues decreased 5% year-over-year to $31.59 billion but came in above the Street estimates of $31.44 billion. 

Segment-wise, Consumer & Business Banking net revenue was $6.1 billion, up 8% on the back of growth in deposits and client investment assets. However, mortgage fees faltered 35% year-over-year. 

Underwriting business was on the downside, with both equity and debt underwriting declining 76% and 20%, respectively. Yet, advisory fees provided some respite, surging 18%. 

Additionally, Commercial Banking (CB) revenue came in at $2.4 billion, flat on a year-over-year basis, while Asset & Wealth Management (AWM) revenue grew 6% to $4.3 billion on elevated loans and deposits balance. Corporate & Investment Bank (CIB) revenues dropped 7% on lower banking and markets & securities services revenue. 

Net interest income (NII) jumped 7% to $14 billion on the back of balance sheet growth and elevated rates, which was partly mitigated by the reduction in NII related to PPP loans. The provision for credit losses was $1.5 billion in the quarter.  

On the negative side, non-interest income dropped 12% to $17.6 billion, mainly due to lower investment banking fees. Non-interest expenses were reported at $19.2 billion, up 2% year-over-year. 

In the quarter, average loans grew 5%, while average deposits were up 13%. Additionally, the return on total capital employed came in at 16%, while the return on equity was 13%. 

CEO’s Comments 

Encouragingly, JPMorgan CEO Jamie Dimon commented, “In the quarter, we extended credit and raised capital of $640 billion for large and small businesses, governments and U.S. consumers… Our focus this quarter remained on helping our clients navigate difficult markets and unpredictable events, which included working with governments to implement economic sanctions of unprecedented complexity.” 

“We remain optimistic on the economy, at least for the short term – consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine,” Dimon added. 

Capital Deployment 

During the quarter, JPMorgan paid $3 billion as common stock dividends and repurchased common shares worth $1.7 billion. 

Remarkably, a new common equity share repurchase program worth $30 billion was announced by the bank’s Board of Directors, effective May 1, 2022.  

Wall Street’s Take 

Following the Q1 results, Evercore ISI analyst Glenn Schorr reiterated a Buy rating on JPMorgan but lowered the price target to $150 (17.83% upside potential) from $160.  

The rest of the Street is cautiously optimistic about the stock, with a Moderate Buy consensus rating. That’s based on seven analysts suggesting a Buy, seven analysts recommending a Hold, and 1 one analyst suggesting a Sell. The average JPMorgan price target of $163.71 implies 28.36% upside potential to level seen at 9:39am EST on Thursday. Shares have decreased about 13.7% over the past year. 

Bloggers Weigh In 

Bloggers seem enthused by the company’s earnings results.  TipRanks data shows that financial blogger opinions are 89% Bullish on JPM, compared to a sector average of 70%.

Bottom-Line 

JPMorgan’s strategic moves, cost management, branch restructuring, and robust loan demand, along with high analyst ratings are considerable factors for investing in this stock. However, investors might be cautious about relatively lower rates and high inflation, along with the bank’s capital markets business, investment banking, and mortgage banking. 

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