When JPMorgan Chase (NYSE:JPM) kicks off second-quarter earnings season for banks this Friday, its shareholders can anticipate a typically solid performance.

Analysts expect the nation's biggest bank by assets to earn $1.60 per share in the three months ended June 30. That compares to $1.65 per share in the first quarter of the year and $1.55 per share in the second quarter of last year.


2Q17 estimated

1Q17 actual

2Q16 actual

JPMorgan Chase diluted earnings per share




Source: Yahoo Finance, JPMorgan Chase.

Depressed trading revenue

The decline from the first quarter can largely be explained by an expected drop in trading revenues. JPMorgan Chase earned $6.5 billion in trading and related revenues last quarter, driven by increased activity among its institutional investor clients. But low market volumes and volatility in the latest quarter acted as headwinds.

"Low rates, a more cautious outlook on rates, low volatility have led to low client flows and a generally quiet, subdued and challenging trading environment," JPMorgan's chief financial officer Marianne Lake said at an industry conference at the end of May. "There's not a lot to trade around right now, and so there's not a lot of market themes."

The impact of interest rates

Long-term interest rates also worked against banks last quarter, to Lake's point. The yield on 10-year Treasury bonds, which serves as the benchmark long-term interest rate in the United States, oscillated between 2.3% and 2.6% in the first quarter. This range dropped to between 2.15% and 2.4% in the second quarter.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts.

JPMorgan Chase, like most banks, earns more money as interest rates rise. This is because higher interest rates translate into higher loan yields. And because loans are one of the main products banks sell, a higher price (i.e., yield) for that product is almost necessarily good for the top line.

In its first-quarter 10-Q, JPMorgan Chase estimates that a 100 basis point, or 1.0 percentage point, increase in short- and long-term rates would equate to $2.3 billion worth of additional annual net interest income.

Fortunately, while long-term interest rates fell, short-term interest rates are heading in the right direction. The Federal Reserve has now increased the Fed funds rate, the country's principal short-term interest rate benchmark, three times since the beginning of last December. It did so most recently in March and June. These moves will help to offset the impact of lower long-term rates.

Stress test performance

Interest rates and trading results aside, the second quarter was generally good for JPMorgan Chase. The clearest indication of this was its performance on this year's stress tests.

Jamie Dimon, Chairman and CEO of JPMorgan Chase.

Jamie Dimon, Chairman and CEO of JPMorgan Chase. Image source: JPMorgan Chase.

The New York-based bank sailed through the tests' first phase, the Dodd-Frank Act stress test, or DFAST, with far more capital than it would need to survive a severely adverse economic scenario akin to the financial crisis. It also had a good showing in the second round, the Comprehensive Capital Analysis and Review, or CCAR, which tests whether banks' capital planning processes are sufficiently sophisticated to continue operating through a deep downturn.

The net result was that JPMorgan Chase received approval from regulators to increase its dividend and share repurchase authorization. In a press release issued immediately after the CCAR results were published, JPMorgan Chase said that its board intends to raise its quarterly dividend by 12%, to $0.56 per share, starting in the third quarter. And over the next four quarters, the bank expects to buy back $19.4 billion worth of its common stock.

In sum, while JPMorgan Chase's second-quarter earnings per share is expected to retreat from the first quarter, there's nothing in the bank's performance over the last three months that changes the otherwise optimistic investment thesis underlying its stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.