While JPMorgan Chase (JPM 1.44%) reported a 7% decrease in revenue last quarter, there’s another side to its third-quarter performance that investors can take solace in. Namely, despite the challenging revenue environment, the nation's biggest bank by assets reported an impressive 15% return on tangible common equity. To learn more about JPMorgan Chase's quarter, check out the video below.
A full transcript follows the video.
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Gaby Lapera: Let's talk a little bit about J.P. Morgan and those other banks that do rely a bit more on trades.
John Maxfield: J.P. Morgan Chase. If you're just looking at those top-line changes in its revenue, you would say this bank had a horrible quarter. Its revenue fell by any other bank -- I think the exception was Goldman Sachs. The reason was, again, J.P. Morgan Chase stands at the intersection of global finance. It has these enormous Wall Street operations, and it's serving as a market maker for companies that are looking to buy and sell whatever large institution or security that you're talking about.
When fears of China came out, what happened was, there was a lot of volatility in the credit markets. When you have a lot of volatility in the credit markets, investors in them will back up to stay out of the mix. When they back up, that volume decreases. J.P. Morgan Chase would be serving as a market maker and administering.
Because that volume decreases, and therefore its commissions decrease, it's going to see a large drop. That's exactly what J.P. Morgan Chase saw. However, it's important to keep in mind that even a "bad quarter" for this bank, it's still an excellent bank. I think it earned 15% on its equity. It returned something on an annualized basis, and returned 15% on its equity.
To put that into context, typically what you want to see from a bank is that it's exceeding its cost of capital. If it's exceeding its cost of capital on its profitability, that means it's creating value for its shareholders. Whereas, if it's under its cost of capital, it's return on equity is under its cost of capital, that means it's destroying value for its shareholders.
Lapera: J.P. Morgan Chase did exceed its cost of capital by about 4%.
Maxfield: That's right. J.P. Morgan Chase's estimated cost of capital is around 11%. The fact that it's exceeding it -- and a lot of other banks are not only not exceeding it, but they're underperforming by a large margin. Something important for J.P. Morgan Chase's investors to keep in mind is, even in a bad quarter, you're still looking at an extremely profitable bank.
