JPMorgan Chase beat Q3 2017 estimate, trading revenue dips 27%

Global investment banking and finance services provider JPMorgan Chase & Co. (NYSE: JPM) reported a better than anticipated fiscal 2017 third-quarter earnings and revenue on last Thursday.

However, the stock continued to stay flat due to a 27% decline in bond trading revenue. It can be remembered that Jamie Dimon, Chairman and CEO of JPMorgan Chase, had warned in mid-September that trading revenue could decline as much as 20% in the third-quarter.

The reported decline was greater than the guidance and therefore the stock remained unmoved.

Still, we expect the stock of JPMorgan Chase, which closed Friday’s trading session at $95.86, to rally due to reasons given below.

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The New York-based banking behemoth reported fiscal 2017 third-quarter net revenues of $26.20 billion, up from $25.512 billion in the similar period last year. Net income for the quarter ended September was $6.732 billion, or $1.76 per share, compared with $6.286 billion, or $1.58 per share, in the corresponding period of 2016. Analysts had anticipated earnings of $1.65 per share on revenues of $25.23 billion. The Q3 results include a legal benefit of $107 million.

Rising interest rates and loan growth had a positive impact on the company’s top line. However, it was partially offset by lower trading revenues, investment banking commissions, and mortgage banking fees.

Segment wise, Consumer and Community Banking revenue increased 6% y-o-y to $12.033 billion. Under the division, Consumer & Business Banking revenues increased 15% to $5.408 billion. However, Mortgage banking revenue declined 17% to $1.558 billion.

Corporate & Investment Bank revenue was $8.590 billion, down 9% on y-o-y basis. The poor performance was mainly due to a 16% decline in Markets & Investor Services revenue to $5.496 billion. It was partially offset by a 5% increase in Corporate Banking revenue to $3.094 billion. Commercial Banking revenue increased 15% to $2.146 billion.

Average Core loans grew 7% from the prior year to 837.5 billion. Net interest income, a measure of profitability, was $13.10 billion, up $1.20 billion from last year. Provision for credit losses rose 14% y-o-y to $1.5 billion, mainly due to reserve build in Consumer loan portfolio. However, non-performing assets declined 21% to $6.20 billion, from the prior-year period. Both credit card sales volume and merchant processing volume increased 13%.

As it can be understood, the overall performance of JPMorgan Chase was impressive. Barring Corporate & Investment Bank, all other segments posted an increase in net income, compared to last year. Echoing a similar thought, Jim Sinegal, a Morningstar analyst, stated “the results were solid, but not exceptional”.

JPMorgan Chase is expected to benefit from a rising interest rate environment and loan growth. At the end of the September quarter, the bank had a healthy Basel III CET1 ratio of 12.5%. Thus, fundamentally, we forecast an uptrend in the stock of JPMorgan Chase.

The stock continues to trade above the support level of 95. Furthermore, the stock is also trading above its 50-period exponential moving average. Finally, the RSI indicator is moving above the reading of 50. Thus, we anticipate a break out on the upside.

To gain from the probable uptrend, an investment may be made in a high or above option. The contract will be bought when the stock of JPMorgan Chase trades near $95. Furthermore, a date around October 24 would be selected for the expiry of the option contract.