Second-quarter earnings fell at JPMorgan Chase (NYSE:JPM) after low interest rates and a steep drop in mortgage banking income overpowered a $931 million drop in expenses.
The nation's biggest bank by assets said on Tuesday that it earned $8.38 billion before taxes in the three months ended June 30 compared to $8.56 billion in the year-ago period. It amounted to a 2.1% decline.
On a per-share basis, JPMorgan's after-tax diluted earnings per share increased by 5.5% to $1.54, from $1.46 in the second quarter of 2014. The boost stemmed from a lower tax bill and a drop in its outstanding share count.
Revenue at the New York bank took a significant hit, falling by $866 million, or 3.5%, compared to the same period last year.
Low interest rates were the primary culprit. Despite the fact that JPMorgan's interest-earning assets rose by $74 billion, it nevertheless earned $114 million less in net interest income thanks to a 10-basis-point decline in the amount of money it generates from investing in loans and fixed-income securities.
Had the bank's net interest margin remained stable, the bank would have earned $524 million more net interest income than it did in last year's second quarter.
Fee-based revenue was also down at JPMorgan. The hardest hit line item was mortgage banking income, which fell from $1.29 billion last year to only $783 million this year, equating to a 39.3% decline.
Higher loan loss provisions also ate away at the bank's pre-tax earnings. From the beginning of April through the end of June, JPMorgan set aside $935 million in anticipation of future loan losses. In the same stretch last year, it set aside only $692 million.
The highlight of JPMorgan's second-quarter performance was the nearly $1 billion drop in operating expenses. The principal metric analysts and commentators use to assess this is a bank's efficiency ratio, which communicates how much it costs a bank to generate $1 in earnings. In this case, JPMorgan's efficiency ratio fell to 60.9%, down from 62.5% last year. This gets it ever closer to the 60% threshold that distinguishes truly exceptional banks.
All things considered, despite the continued drag of low interest rates, JPMorgan still cleared a 1.01% annualized return on assets for the quarter and a 11% return on common equity. Both figures are very good at this stage in the business cycle. The latter figure, in particular, exceeds the 10% benchmark that generally dictates whether or not a bank's shares trade for a premium to book value.
The market has thus far taken a favorable view of JPMorgan's results, pushing its shares higher in early morning trading.