JPMorgan Chase Earnings Show Why the Bank Is Best-in-Breed

JPMorgan Chase (JPM 2.51%) is often considered the best of the big banks, and its second-quarter earnings report shows why.

In this segment from Industry Focus: Financials, host Michael Douglass and Fool.com contributor Matt Frankel discuss why JPMorgan Chase is one of the winners of earnings season in the banking business.

A full transcript follows the video.

This video was recorded on July 16, 2018.

Michael Douglass: Let's turn to bank No. 3 of the Big Four: JPMorgan, which had, frankly, pretty good numbers, generally speaking. 26% year over year earnings growth -- again, in large part due to tax reform. If I sound like a broken record, it's probably going to happen again with Bank of America. 6% revenue growth year over year. Frankly, ROE, 14%, which is very favorable compared to Citigroup's 9%; and, a 56% efficiency ratio. Really good to see those numbers all trending in the right direction.

Matt Frankel: JPMorgan had a bunch of best-in-breed statistics in their earnings report. Just to name a few, I mentioned trading revenue, how it was such a disappointment with Citigroup. It was the opposite with JPMorgan. Their trading revenue jumped by about 13% when they were expecting it to be flat year over year. So, this was a big surprise, as well as being a great achievement. And it was spread out pretty evenly among fixed income trading and equities trading. In both areas of the market we're looking at in trading, they did very well. They actually wound up with the No. 1 market share in global investment banking fees. Considering who they're up against, that's pretty impressive.

Douglass: Yeah. I'll note as well, one of the things that I tend to look at with any sector is when you have two competitors that have comparable business areas. For example, Citigroup trading, JPMorgan trading. When one of them performs really well and one of them performs really badly, that tells you it's not just a secular trend, it's actually an issue of how they're executing. This is a really good sign for JPMorgan, and not a great sign for Citigroup, that in the same environment, Citigroup struggled, and JPMorgan prospered. That tells you a lot about the quality of management and what they're doing with that particular part of their business.

Frankel: Yeah. The only reason I wouldn't call JPMorgan the best of the best in terms of bank earnings so far is because they had a couple of negative items. First, and this is not too significant, the had a $330 million charge related to their credit card business. If you're not following the credit card markets, JPMorgan Chase is involved in a big rewards battle with every other credit card issuer where they're seeing who can offer users the biggest sign-up bonus, rewards points. Related to their credit card rewards, their customers are actually taking rewards even more than they thought they would, so there was a pretty big charge that was unexpected.

More significantly, JPMorgan's interest margin actually contracted from the first quarter. You would expect the opposite in a rising rate environment. Generally, a good portion of bank deposits are non-interest-bearing. The rest, interest rates paid on deposits tend to rise slower than market interest rates are going up, so you tend to see margin expansion in rising rate environments. In at least this quarter, in JPMorgan's case, we're really not seeing that.

Douglass: That's a troubling sign. To be fair, it was essentially flat. We're talking a 0.02% decline in interest margin. But, the fact of the matter is, as the Fed keeps increasing rates, the whole reason banks have been on a run is threefold: deregulation, tax reform, and an expectation that as the Fed raises rates, banking will get more profitable. The fact that it isn't, in this case, for JPMorgan specifically regarding interest rates, is a concern. It's also a way in which it stands out from the other banks, which saw improved net interest margins -- again, not substantially, but they did see improvement. To me, that creates some questions.

Again, one quarter or another doesn't necessarily tell us a lot. Things happen with the timing of various ways of doing things. That's really going to be a question for JPMorgan over the next couple of quarters. It's something I will be keeping a very close eye on, because I want to make sure they're executing well in a rising rate environment. Frankly, that's when they should be executing well.

Frankel: Yeah, definitely. JPMorgan is pretty much firing on all cylinders these days. We're being kind of nitpicky with the interest margin and credit card stuff. There's really not that much going wrong with JPMorgan Chase at all.

Douglass: Yeah. Overall, a strong earnings showing, just some questions that we need to consider the next time they report earnings. We want to make sure that those trends are reversing themselves.