JPMorgan Chase's (JPM 1.68%) first-quarter earnings results didn't only smash through consensus estimates but also came with a nice raise to the bank's full-year guidance. It was another reminder of how reliable JPMorgan and its fortress balance sheet are in times of duress.
The guidance provided by management for the rest of the year was undeniably strong but also potentially toward the conservative end, given how uncertain the outlook for the rest of the year still is. Here is what could lead JPMorgan to generate even better results.
Examining the guidance
JPMorgan Chase is now guiding for $81 billion of net-interest income (NII) in 2023, which is the money that banks make on loans and securities after funding those assets with liabilities such as deposits. NII is a key source of bank revenue, and management boosted guidance by nearly 11% from last quarter.
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The big reason for the boost has to do with deposits and the banking crisis that ensued in March. As customers became concerned about their uninsured deposits at smaller banks, they viewed money-center banks like JPMorgan as a safe haven because they are "too big to fail."
As a result, JPMorgan was able to reverse an industrywide trend of deposit outflows and actually start to see inflows in March. Average deposits at JPMorgan fell 3% in the first quarter, but period-end deposits rose 2%, which demonstrates the intra-quarter reversal. CFO Jeremy Barnum said the bank managed to retain about $50 billion of these new deposits.
Barnum, however, noted that the upward revision to the guidance had less to do with the new deposit inflows and can be more attributed to the fact that the interest-rate outlook has changed. The market now expects the Federal Reserve to pause its interest rate hikes and cut interest rates sooner than expected.
If this materializes, it will actually slow down the upward repricing of deposits sooner than the bank initially expected and perhaps enable banks to reprice loan yields more appropriately to the current rate environment as well. Barnum also noted that the bank is expecting higher credit card balances, which helps on the asset side of the NII equation.
How NII could come in even better
Based on NII in Q1, JPMorgan had a run rate of nearly $83 billion. But Barnum noted that he doesn't think that NII run rate is sustainable. In the medium term, management actually views a mid-$70s billion NII run rate to be more realistic.
Still, everything is quite uncertain and will be impacted by "deposit reprice, investment portfolio decisions, the dynamics of QT [quantitative tightening] and RRP [reverse repo], the trajectory of Fed funds as well as the broader macroeconomic environment, including its impact on loan growth."
But remember, the bank is not actually baking in the $50 billion of new deposits into its guidance and isn't currently projecting to retain most of them. That's because they are "flighty deposits" by definition, according to Barnum, and could still find their way into higher-yielding bank products like money market funds, which would drive up their cost. It's possible the customers are only temporarily parking them at JPMorgan.
However, moving deposits is not something that customers necessarily like to do, and it can be a process full of friction, so JPMorgan could very well end up retaining more of these deposits than it currently expects, which would drive NII higher. Plus, nobody really knows how aggressively deposits will reprice because the Fed has never raised interest rates so fast. So it's smart for JPMorgan to stay conservative, although it's entirely possible that NII comes in even better than expected.
Prepare for a wide range of outcomes
Given that several banks just failed, most bank-management teams are likely going to stay pretty conservative because there is a wide range of potential outcomes.
The outlook is still extremely uncertain, and nobody knows how things will play out. Even JPMorgan CEO Jamie Dimon said that people need to prepare for higher interest rates to last longer, not because that's necessarily going to happen but because it's a possibility.
If this happens, JPMorgan may need to lower its guidance later this year. But I think there is also the possibility that the bank retains more deposits and performs better on deposit costs than it is expecting, which would lead to better results even after just raising guidance.
