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Morningstar | JPMorgan Starts 2019 on Strong Footing, Maintains Guidance

Wide-moat JPMorgan Chase reported solid first-quarter results that were ahead of consensus, with net income on a reported basis of $9.2 billion, or $2.65 per diluted share. The quarter’s return on tangible common equity was 19%, matching results from first-quarter 2018. Revenues were up 4%, while expenses were only up 2%, leading to operating leverage and growth in net income of 5%. With continuing share repurchases, another 49.5 million shares (average diluted shares outstanding were down 5% from first-quarter 2018), EPS growth was still in the double digits, coming in at 12%. While these results were ahead of consensus for the quarter, management reiterated that they felt their previous full-year guidance was still appropriate. These results fit in with our expectations for the bank. JPMorgan is already operating at full capacity, so we see roughly steady returns on equity, and while growth may slow, share repurchases along with no turn in the credit cycle should still allow EPS growth in the high single to low double digits. After some minor adjustments, we are increasing our fair value estimate to $112 per share.

The managed overhead ratio improved to 55%, and the bank continues to support massive investments in technology and expansion initiatives. The bank was largely positive on its current expansion initiatives and said it's seeing positive results already, although it is still early in the process. Average loans were up 4%, as home equity and mortgage loans continued to decline, while card loans saw strong growth, and commercial lending grew moderately. On that same note, credit costs remained range-bound and generally below normal for JPMorgan, with charge-offs on almost all portfolios coming in below historical norms.

While we were originally hoping for some pickup in markets activity, it became clear as the quarter developed that this was not going to happen. As a result, corporate and investment banking revenue was down 6%, and net income was down 18%. This was driven by fixed income and equities-related revenue. The bank continues to gain share in many I-banking and market-related segments, regardless. Management highlighted during the investor day that the overall market may continue to shrink for certain segments, namely FICC and equities, so while some cyclical activity may pick up, these overall areas may face longer-term growth headwinds in general. Even so, the consumer and community banking segment performed very well, with net income up 19%. While mortgage revenue remained under pressure, card sales volumes were up 10%, merchant service volumes were up 13%, and core loans were up 4%, largely driven by card balances. The commercial banking segment also saw growth, with net income up 3%, with corporate and middle market revenue up 19% and 6%, respectively. The asset and wealth management segment also had a decent quarter, as the bank still saw positive net flows, but some margin compression did kick in to neutralize this.