With JPMorgan Chase (JPM 2.33%) reporting earnings on Friday morning, we can start to get a sense for how Bank of America's (BAC 3.23%) quarter unfolded as well, the actual results of which are due out on Tuesday.
There are three things in particular that are worth taking away from JPMorgan Chase's performance if you're trying to read the tea leaves for other banks.
1. Better-than-expected earnings
The most important takeaway from JPMorgan Chase's results is that the bank exceeded analysts' expectations. This bodes well for Bank of America, given the significant similarities in their business models.
JPMorgan Chase's earnings per share in the second quarter grew by 17% on a year-over-year basis, coming in at $1.82 per diluted share. Analysts expected it to earn $1.60 per share -- 12% below the actual figure.
One thing that helped JPMorgan Chase was a one-time legal settlement that Bank of America won't benefit from. But aside from that, Bank of America will have likely experienced similar trends in its commercial and investment banking operations.
The interior of a Bank of America branch. Image source: Bank of America.
2. Lower trading revenues
One trend that Bank of America would rather not have participated in is the decline in trading revenues at JPMorgan Chase in the three months ended June 30.
JPMorgan Chase Chairman and CEO Jamie Dimon made a point on the conference call to say that analysts were too focused on trading results. He's right, but if one is going to talk about JPMorgan's performance last quarter, it's impossible to ignore the fact that revenue from its fixed-income trading unit dropped 19%.
To be clear, trading revenues are notoriously volatile. They follow sentiment and activity in the markets. The more trading that takes place, the more money banks like JPMorgan Chase and Bank of America make from their trading operations.
As a result, because the markets were so placid in the second quarter, with little fear or volatility even on the horizon, investors should assume that Bank of America's trading results will mirror JPMorgan Chase's.
3. Compressed lending margins
There's been a lot of noise over the last few months about rising interest rates and how good that is for banks. But while short-term rates have indeed been on the ascent, thanks to the Federal Reserve, long-term rates were lower for much of the second quarter than they were in the first three months of the year.
U.S. Target Federal Funds Rate data by YCharts.
This creates countervailing forces for banks. On the one hand, they'll make more money because the central bank is raising the fed funds rate, the principal short-term interest rate benchmark in the United States. But, on the other hand, lower long-term rates work in the opposite direction.
In JPMorgan Chase's case, in turn, instead of expanding the yield on its portfolio of interest-earning assets in the second quarter, the yield contracted. Its net interest margin came in at 2.31%, down from 2.33% in the first quarter.
As a bank that faces these same headwinds, it wouldn't be surprising to see pressure on Bank of America's lending margins as well.
Final takeaways
All things considered, this should be a relatively boring quarter for Bank of America. It turned the corner from the financial crisis two years ago. Its earnings have stabilized considerably over the past few years. And it's positioned to make more money as rates move higher.
This doesn't mean you should necessarily buy its stock now. It's run up considerably since the presidential election. But while it could certainly still go higher, it's my belief that investors have more to gain than to lose by waiting for a pullback in the market before diving further into it.
