JPMorgan Chase (JPM 1.18%), the largest bank in the U.S. by total assets, will kick off earnings season, as it normally does, on Jan. 14 when it reports results from the final three months of 2021 and full-year earnings. The stock had a nice year in 2021, appreciating nearly 25%, which fell short of competitors like Wells Fargo, Bank of America, and also the S&P 500 index, although the bank trades at a pretty high valuation right now.
Analysts on average expect JPMorgan to report just shy of $3 in earnings per share (EPS) for the fourth quarter on revenue of $29.8 billion. For the full year, the average analyst projection is roughly $15 of EPS on total revenue of $123.5 billion. Here's what to expect from the bank in its upcoming earnings report.
Lending
Lending and the bank's corporate and investment bank are the two largest drivers of revenue at JPMorgan Chase. Lending has been hit hard since the pandemic began. Consumers have been flush with cash, while businesses have not been taking on debt with the uncertainty and supply chain issues. Low rates have left the bank with nowhere productive to deploy its excess cash.
Image source: JPMorgan Chase.
In the third quarter, net interest income, which is the profit the bank makes on loans and securities after covering its cost of funding, rose very slightly from the second quarter. Average loan balances across the bank in the third quarter rose about 2% from the second quarter, and chief financial officer Jeremy Barnum noted that "while loan growth remains muted, we see a number of indicators to suggest it has stabilized and may be poised to begin more robust growth across the company and particularly in [credit] card." JPMorgan Chase is a big credit card player, and I would expect credit card loan balances to rise because credit card applications recently hit a pandemic high.
On the commercial side, chief operating officer Daniel Pinto at a recent conference said supply chain disruptions have largely been holding back corporate loan growth, but also that with such "vibrant" capital markets right now, corporations really don't need to rely on bank borrowing. He expects commercial borrowing to bounce back as supply chain issues normalize.
In the third quarter, JPMorgan Chase guided for full-year net interest income of $52.5 billion. Through the first three quarters of 2021, net interest income at the bank was roughly $38.7 billion, which means the bank is expecting around $13.8 billion in net interest income for the fourth quarter.
Investment banking
For the corporate and investment bank, which has flourished since the pandemic began, Pinto said markets revenue -- which includes equity sales, trading, and derivatives, as well as fixed income, which refers to instruments like bonds and Treasuries -- should be down about 10% in the fourth quarter of 2021 compared to the fourth quarter of 2020. Equity markets are expected to stay flat, while fixed income is expected to decline. Pinto noted, however, that last year's fourth-quarter markets revenue, which came in at roughly $5.9 billion, was a record for a fourth quarter.
In terms of investment banking fees, which have enjoyed a great year in 2021, Pinto expects them to be up in the mid-30s percentages compared to the fourth quarter of 2020. Investment banking fees in the fourth quarter of 2020 were $2.56 billion, so a 35% bump would equate to roughly $3.46 billion, which would only be lower than investment banking fees in the second quarter of this year, although just narrowly.
Expenses and credit quality
Management is expecting full-year expenses to come in around $71 billion, so fourth-quarter expenses are expected to be around $17.5 billion when you strip out the first three quarters. That would make quarterly expenses the second-lowest for any quarter of the year. Expenses in general have been declining from the first half of the year, as the bank deals with less pandemic-related expenses and other rising costs in the business due to revenue-related expenses and higher wages. Pinto hinted that expense increases this year will be more targeted at investing back in the business.
Credit quality has been incredibly benign through the first three quarters of 2021, as there hasn't been much loan growth to provision for losses, and consumers have been financially healthy. The net charge-off rate at JPMorgan, which shows how much debt is unlikely to be collected as a percentage of the entire loan book, fell to just 0.21% in the third quarter. Management has guided for net charge-offs in the higher-risk credit card portfolio to end the year at less than 2%, which is spectacular.
As a result of such good credit quality, the bank has been releasing reserve capital -- which was set aside for potential loan losses at the beginning of the pandemic -- back into earnings, juicing profits all year long. JPMorgan has now released reserves for four straight quarters. While the reserve releases are likely coming to an end, there could be some more in the fourth quarter. The interesting thing will be to see if the benign credit numbers have bottomed and may now start to rise as aid from the federal government and Federal Reserve runs out, and as loan growth begins to rise again.
Will JPMorgan beat?
Since the fourth quarter of 2016, JPMorgan has only missed on earnings estimates three times and missed on revenue estimates five times, so the odds are usually good that the bank will surpass them. If there is a reserve release again, I would be even more certain the bank will top expectations, because analysts seem not to have incorporated them into their models in past quarters; or if they are, they've underestimated their size. With loan growth likely to tick up slightly, higher long-term yields in the fourth quarter, and a still-healthy quarter of investment banking, I would expect JPMorgan to beat.
