Several banks in the U.S. kicked off the first-quarter earnings season, with investors paying particular attention to the largest bank in the U.S., JPMorgan Chase (JPM 0.71%). The bank beat analysts' top- and bottom-line estimates on several metrics. Despite this, the stock price dropped by 6.5% on the Friday following its morning earnings call.
Here are four things investors need to know about JPMorgan's earnings report.
NYSE: JPM
Key Data Points
1. Net interest income guidance disappointed
In the first quarter, JPMorgan Chase posted solid earnings, with around $42 billion in revenue and $13.4 billion in net income, which grew 9% and 6% from last year, respectively.
The bank's Q1 net interest income (NII), or the difference between its revenue on interest-earning assets minus the expenses on its interest-bearing liabilities, increased 11% from last year but declined 4% compared to the fourth quarter. The bank's NII fell quarter over quarter due to margin compression and lower deposit balances.
JPMorgan Chase CEO Jamie Dimon said, "Looking ahead, we expect normalization to continue for both NII and credit costs." The bank guided for $90 billion in NII for the year, which aligned with its previous guidance. However, investors expected the bank to raise its full-year NII by $2 billion to $3 billion, which was one reason for the stock's sell-off.
2. Investment banking fees are up
After a blistering hot 2021, initial public offerings (IPOs) and debt offerings fell off a cliff. Higher interest rates and market volatility have weighed on these activities, but companies are now adjusting to the higher interest rate environment. According to Dimon, "We're seeing better IPO performance," but the bank has remained "a little bit cautious" about its outlook here.
Early signs point to an investment banking rebound, which would be great for JPMorgan and others with large investment banking operations. JPMorgan's investment banking revenue grew 21% in the quarter, to $2 billion, thanks to higher debt and equity underwriting fees.
3. Consumers are resilient but are worth monitoring
Another common theme over the past few years has been the resiliency of the consumer. While many experts predicted a recession sometime in 2023 or 2024, one has failed to materialize thanks to robust consumer spending. Dimon told investors, "Consumers remain financially healthy, supported by a resilient labor market."
Bank investors will want to continue monitoring credit metrics that could provide more insight into consumers' health. JPMorgan's consumer and community banking (CCB) segment reported net charge-offs on its credit card services of 3.32%, up from 2.79% in the fourth quarter and 2.07% in the third quarter of 2023, respectively.
Consumer delinquencies are also something to watch. The 30-day delinquency rate on JPMorgan's credit card loans increased from 2.14% in Q4 2023 to 2.23% in the first quarter of 2024.
Image source: Getty images.
4. JPMorgan's capital position remains solid
JPMorgan is one of the best-run banks in the U.S., which becomes apparent when you look at its capital ratios. One key metric in the banking industry is the common equity tier 1 (CET1) ratio. The CET1 compares a bank's capital to its assets and shows how well it could absorb a financial shock. JPMorgan's CET1 ratio of 15% remains the best in its peer group, outpacing Citigroup (13.5%) and Wells Fargo (11.2%), which also reported on Friday.
JPMorgan's firm capital footing gives it flexibility and capital to reinvest in growth and maintain an attractive capital return portfolio. JPMorgan has been prudent in managing its balance sheet, so the bank has performed well relative to peers during the rising interest rate environment.
Investors should stay the course
JPMorgan Chase's earnings were solid, but the stock sold off anyway. One likely reason is that the stock has gone on a tear, increasing 45% from its October lows. Coming into this earnings announcement, the bank was valued at nearly 2.5 times its tangible book value (TBV), on the higher end of its valuation over the past decade.
Given its higher valuation, it isn't surprising that the stock has cooled off and taken a breather here. After its recent sell-off, the bank trades around 2.22 times its TBV, above its 10-year average of 1.85.
JPM Price to Tangible Book Value data by YCharts.
Despite the sell-off, JPMorgan Chase remains one of the best bank stocks investors can own. Its capital ratios are solid, and its balance sheet is strong, giving the bank flexibility to handle whatever the economy can throw at it. Shareholders should continue to stay the course with the bank stock, which has proven itself time and time again.
