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Morningstar | Several One-Time Gains Help Power JPMorgan Through 2Q; Business Is Healthy, but Rate Cuts Loom

Wide-moat JPMorgan Chase reported excellent second-quarter results that were well ahead of consensus, with net income of $9.7 billion, or $2.82 per diluted share. The quarter’s return on tangible common equity was 20%, a recent high for the bank. Revenue was up 4%, while expenses were only up 2%, leading to solid operating leverage. JPMorgan also experienced a one-time gain from the resolution of certain tax matters of $768 million in the quarter, leading to growth in net income of 16%. With continuing share repurchases, another 47.5 million shares (average diluted shares outstanding were down 5% from second-quarter 2018), EPS growth was 23%. The return on tangible common equity came in at 20%. Management targets 17% as a long-term goal, implying that current results are more representative of peaking profitability. Normalizing for the tax gain, the return on tangible equity was closer to 18%. The bank also benefited from a gain on its ownership in Tradeweb during the quarter. Management gave more details around their expectations for net interest income, as they are now incorporating the possibility of one to several rate cuts in their guidance. We have now incorporated three rate cuts through 2020 into our forecasts, and as a result of these and other changes, we are reducing our fair value estimate for JPMorgan to $110 per share from $112.

The managed overhead ratio stayed steady at 55%, and the bank continues to support massive investments in technology and expansion initiatives, as marketing, occupancy, and technology expense continued to climb. Average core loans were up 3%, as home equity and mortgage loans continued to decline, while card loans saw strong growth, up 8% year over year. Auto loans are also continuing to decline. Commercial lending only grew moderately, with C&I loans roughly flat year over year while CRE was up 2%. Credit costs remained range-bound and generally below normal for JPMorgan, with charge-offs on almost all portfolios coming in below historical norms with no obvious signs of stress. In fact, even as peers are seeing some normalization within their credit card portfolios, JPMorgan had a steady net charge-off rate, although delinquency rates were up slightly. While we wait for credit to normalize, credit costs remain low, and the banks are well capitalized this time around. JPMorgan ended the quarter with an advanced common equity Tier 1 ratio of 13%.

The consumer and community banking segment was the clear standout in the quarter. Returns on equity improved, efficiency improved, deposit growth was OK at 3%, and card and merchant processing volumes were both up double digits. One drag on the segment has been the home lending unit, and while management acknowledged that the structural forces that have worked against the business largely remain in place, they do expect some pickup in volumes and profitability in the third quarter. The corporate and investment banking segment remained under pressure, with I-banking revenue down year over year, although JPMorgan still managed to gain share and retained its number-one ranking here. Equity and fixed-income revenue also remained under pressure. The commercial banking segment saw similar themes, with I-banking revenue down 20% year over year, although middle-market banking still managed to squeeze out some growth. Asset and wealth management saw assets under management and overall client assets both up 7%, driven by continued net inflows, although this didn’t quite translate into net income growth for the segment. With ongoing investments within the segment, this will eventually turn into bottom-line growth.