JPMorgan Chase & Co. Earnings: Can Dimon's Bank Bounce Back?

The banking industry faces new challenges, and JPMorgan has to work hard to overcome them.

Jul 12, 2014 at 2:05PM

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On Tuesday, JPMorgan Chase (NYSE:JPM) will release its quarterly report, and shareholders haven't been comfortable with the general direction of the banking giant's stock lately. Even though the stock gained ground in the aftermath of Wells Fargo's (NYSE:WFC) earnings report on Friday, JPMorgan Chase shares the greater exposure to trading operations that Bank of America (NYSE:BAC) and other peers have, and poor conditions on Wall Street could eventually threaten JPMorgan's long-term growth strategy if the bank can't figure out ways to get earnings moving back in the right direction.

JPMorgan Chase has been at the center of debate on the American banking industry, with CEO Jamie Dimon inspiring heated discussions about bank regulation and opportunities and challenges in global finance. Yet despite all the criticism that banks have gotten, JPMorgan has traditionally had a relatively conservative approach toward its business, with a greater tendency to stick with tried and true profit-making opportunities rather than aggressively using higher-risk strategies that burned many competitors during the financial crisis. The question is whether Dimon's approach can lead to long-term growth in a more tightly regulated environment. 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

$1.29

Change From Year-Ago EPS

(19.4%)

Revenue Estimate

$23.76 billion

Change From Year-Ago Revenue

(8.5%)

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

When will JPMorgan Chase earnings start growing again?
Investors have gotten a lot more concerned about JPMorgan Chase earnings in recent months, cutting more than 10% from their second-quarter estimates and reducing full-year projections for 2014 and 2015 by 7% to 9%. The stock has had trouble as well, falling almost 5% since early April.

JPMorgan's first-quarter earnings report was the primary driver of the stock's losses during the past three months. The bank's results fell well short of what investors had expected to see, with both revenue and net income falling further than anticipated. As Wells Fargo saw on the same day, JPMorgan's mortgage business suffered greatly, with mortgage originations declining by more than two-thirds from year-earlier levels. But JPMorgan also suffered from declines in its trading business, with fixed-income revenue dropping more than 20%, and later results from Bank of America confirmed that both segments showed signs of weakness nearly throughout the industry.

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Moreover, JPMorgan has already warned that second-quarter results will stay under pressure. In May, JPMorgan warned that revenue in its Markets division would be down 20% from year-ago levels, citing ongoing disinterest among clients in their trading activities. Although JPMorgan held out hope that the rest of the quarter could go more favorably, the trend on Wall Street has been continued low levels of volatility and trading, and so it's unlikely that the bank will be able to outpace its earlier expectations.

Still, one area that has been stronger for JPMorgan Chase as well as Wells Fargo and Bank of America has been the consumer-banking side of the business. In areas like credit cards, banking deposits, and consumer loans, banks have generally seen greater levels of activity, as ordinary consumers get somewhat more comfortable with their economic prospects. Even in a rising-rate environment that's hurting mortgage revenue, a healthier consumer could help support JPMorgan's core banking business to offset some of those losses. Yet given the size of JPMorgan's trading operations, consumer banking by itself won't be enough to jump-start overall growth.

One worry, though, is that JPMorgan's efforts to get in front of its legal liability from business practices before and during the financial crisis aren't yet over. JPMorgan's $13 billion settlement with the Justice Department initially gave investors more confidence going forward, in contrast to Bank of America and its ongoing fight on that front. Yet worries about more possible lawsuits have some JPMorgan shareholders wondering if the outflow of settlement payments will ever end.

In the JPMorgan Chase earnings report, watch to see how the bank's different business lines perform. Moreover, with Dimon now facing health problems, questions about succession are likely to arise, and the answers could have an impact on the stock's long-term prospects.

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Dan Caplinger owns shares of Apple and warrants on Bank of America, JPMorgan Chase, and Wells Fargo. The Motley Fool recommends Bank of America, Apple, and Wells Fargo and owns shares of Bank of America, Apple, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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