How JPMorgan's Earnings Could Make or Break the Dow's Quarter

JPMorgan Chase (NYSE: JPM  ) will release its quarterly report on Friday, and the bank has already warned its shareholders that rising interest rates could lead to a big pullback in its mortgage business. As the first component of the Dow Jones Industrials (DJINDICES: ^DJI  ) to report earnings in the month of October, JPMorgan's results could define not only its own future course, but also the tone of the entire Dow as it attempts to end 2013 on a winning note.

JPMorgan and the banking industry as a whole have done an incredible job of recovering from the financial crisis. Although some hard-hit banks still haven't returned to business as usual, JPMorgan and rivals Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) have all seen their shares regain their pre-crisis levels. Yet rapidly changing conditions in the bond market have led to interest rate volatility, and that poses a threat to JPMorgan's mortgage business and internal investment portfolio. Let's take an early look at what's been happening with JPMorgan Chase over the past quarter and what we're likely to see in its report.

Stats on JPMorgan Chase

Analyst EPS Estimate

$1.21

Change From Year-Ago EPS

(13.6%)

Revenue Estimate

$24.03 billion

Change From Year-Ago Revenue

(7.1%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will JPMorgan earnings fizzle as rates rise?
Analysts haven't been too excited about JPMorgan's earnings prospects in recent months, having cut more than 10% from their third-quarter estimates. But they've been more optimistic about the long run, adding a couple of pennies per share to their full-year 2014 projections. The stock has nevertheless suffered a setback, falling 5% since early July.

At first glance, JPMorgan seemed to carry substantial positive momentum into the quarter. Back in July, the company's second-quarter results were quite strong, with earnings rising 31% and even besting Wells Fargo's 19% net-income rise. But much of JPMorgan's success came from its investment-banking and private-equity segments, with activity in debt and equity underwriting helping to boost investment-banking-related fee income by 38%. By contrast, on the key retail side of the business, JPMorgan saw net income fall 6% despite rises in deposits and mortgage originations. With the mortgage tailwinds expected to turn into headwinds in the third quarter, JPMorgan expected to see mortgage volumes fall as much as 40%, topping Wells' expectations for a 30% decline in mortgage activity.

Arguably the bigger obstacle that JPMorgan faces is the ongoing onslaught of litigation and regulatory difficulties. Late last month, reports surfaced that the bank was discussing a potential $11 billion settlement with state and federal authorities to put to rest allegations of improprieties related to its mortgage practices. That came right on the heels of the bank's $920 million settlement over the London Whale trading scandal, which included a rare admission from JPMorgan of its wrongdoing. Taken piecemeal, shareholders have largely been willing to discount one-time settlements as insignificant to long-term-profit potential. But with new allegations regularly surfacing, investors have already gotten tired of the seemingly endless string of settlement payments JPMorgan has made.

Interest rates also pose a huge threat. JPMorgan CFO Marianne Lake said last month that a two-percentage-point rise in rates could cause $15 billion in losses in the value of the bank's bond portfolio. Even though rising net-interest income would offset some of those losses, the potential for future disruptions when the Federal Reserve starts cutting back on its bond purchases under quantitative easing is huge. Wells has a smaller bond portfolio but could suffer proportionately more because of its smaller capital base. In combination with fee-driven income declines from slower mortgage activity, the impact could be large, and that's a big part of why investors are expecting falling year-over-year revenue and net income.

In the JPMorgan earnings report, look at the results of each of the bank's business lines. Where profits and losses come from should give you insight about the prospects not just for JPMorgan but for many of its peers as well, and the way investors take the news could define the Dow's direction for the rest of 2013 and beyond.

Is JPMorgan the right bank for your portfolio
Bank stocks have soared over the past few years, and surprisingly, bargains of a lifetime are still available. But you need to know where to look to find good bank-stock deals. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find the best banks available. It's completely free -- click here to get started.

Click here to add JPMorgan Chase to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2676841, ~/Articles/ArticleHandler.aspx, 8/30/2014 2:19:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement