J.P Morgan on Friday (12 October) reported good 3Q18 results, with average loan growth up 6% YoY and net interest margins benefiting from higher interest rates. Earnings came in at $2.34/share (+33% YoY) on revenue of $27.8bn (+5% YoY) – both ahead of Thomson Reuters consensus expectations of $2.25 in EPS and $27.5bn in revenue, respectively. This, as better-than-expected retail banking results (profits from lending were the highest they have ever been) offset weakness in its bond trading segment. Consumer banking profit surged 60% YoY to $4.09bn with the bank benefiting from growing deposits and rising interest rates, resulting in more interest income.
Credit conditions remain extremely solid, with no signs of any stress from the increase in US rates, which are still low by historic terms. CEO Jamie Dimon believes that the US economy could be strong for quite a while still, citing the following reasons – consumer confidence is high, wages are growing, and there is a shortage of housing. We note that the operating conditions are almost too good – the rise in rates is really helping with the bank’s operating leverage although we didn’t see much of this in 3Q18, we believe a sizeable impact will be seen for FY18.
In terms of business segments, the firm posted $2.84bn (-10% YoY) in fixed income revenue, missing consensus analysts’ expectations for $2.96bn. Equities trading came in at $1.6bn (+17% YoY) – above the $1.43bn estimate, while corporate and investment banking recorded revenue of $8.8bn (+3% YoY) and consumer and community banking reported revenue of $13.3bn (+10% YoY). Commercial banking revenue came in at $2.3bn (+6.6% YoY), with asset and wealth management revenue of $3.6bn (+3% YoY).
The bank continued to benefit from the Trump administration’s tax law passed in December, which saw its effective tax rate coming in at 21.6% – down from 29.6% in 3Q17.
Looking ahead, the firm maintained its outlook for core loan growth of 6%-7% YoY for FY18 (unchanged from its April guidance).
At a share price of c. $108.13, and a tangible book value of $55.68 with a return on tangible common equity of 17%, we see upside here to $155/ share or more (i.e. at least 45% upside from Friday’s closing share price of $106.95). In our view, this remains an excellent business with good prospects. Credit conditions will deteriorate at some stage, but this still seems some way off.