JPMorgan Banks on Strong Earnings to Boost Its Sagging Stock

JPMorgan strong earningsJPMorgan Chase (NYSE: JPM) reported better-than-expected fourth-quarter earnings on Thursday, but in this market, even strong earnings aren’t good enough. The stock rose about 2% in pre-market trading, but the stock is still down about 10% since the beginning of the year.

Stocks continue to sell off indiscriminately, across all sectors. The market these days is very much like a minefield. Even well-run businesses with strong earnings are getting sold, and that includes JPMorgan Chase.

Here is a rundown of the latest quarterly results from the banking giant.

JPMorgan Earnings Beat Estimates

JPMorgan Chase reported very strong numbers across several key metrics. Earnings per share clocked in at $1.32 per share, handily beating estimates by six cents per share. Revenue also easily beat forecasts. JPMorgan generated $23.7 billion of revenue, well ahead of the $22.8 billion expected by analysts.

JPMorgan earnings were boosted by an improving loan portfolio. Core loans rose 16%, and the company’s loan quality is improving as well. Credit card sales volumes grew 6%.

As a major financial institution, one of JPMorgan’s biggest tailwinds going forward is rising interest rates. Companies like JPMorgan pay short-term interest on deposits and collect long-term interest on loans like mortgages. When interest rates rise, the interest collected rises faster than interest paid.

Indeed, net interest margin, the spread between short-term and long-term deposits and loans, rose 10 basis points last quarter. That is an indicator that traditional banking is doing well, and if the Federal Reserve continues increasing rates in 2016 as expected, JPMorgan will continue to benefit.

Moreover, as interest rates increase, customers are likely to increase the level of deposits with the bank in an effort to earn more interest. Average deposits rose 10% last quarter. This will allow JPMorgan to continue growing its loan activity.

Finally, JPMorgan’s investment bank continues to perform well. It captured the No. 1 spot for global investment banking fees.

Energy Loans Weigh

The one blip on the radar for JPMorgan and future JPMorgan earnings is the deterioration in its energy-related portfolio. As the price of oil and gas collapsed over the past two years, energy companies that use lenders like JPMorgan are deeply distressed.

Fears that energy sector defaults will ripple through the financial system are likely the reason why investors remained unimpressed with JPMorgan’s results. In the earnings release, CEO Jamie Dimon coolly referred to “some stress in energy.” This was a primary factor for JPMorgan’s provision for credit losses in commercial banking rising to $117 million last quarter, up from $48 million in the same quarter last year.

In response, the company continues to cut costs to keep earnings growth intact. JPMorgan’s non-interest expense declined 7% last quarter.

Despite the stress from the energy sector, JPMorgan’s Tier 1 capital ratio is a satisfactory 11%, and tangible book value rose 8% for the quarter.

JPMorgan for Value and Income

JPMorgan Chase stock screens very well from both a value and an income perspective. The stock trades for just 9 times forward earnings, less than 1 times book value, and even offers a 3% dividend yield.

JPMorgan returned $11 billion to shareholders in 2015, consisting of $4.5 billion in net share repurchases and payment of $1.72 per share in dividends.

Still, investors don’t seem convinced in the buy case.

In a down market, even good earnings can’t save stocks. But sooner or later, the panic selling ends, and investors return to the best-of-breed companies. JPMorgan is one of the best-run financial firms with sound fundamental metrics.

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Published by Wyatt Investment Research at