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Earnings season kicks off with the major banks reporting earnings results. JPMorgan Chase & Co. (JPM, Financial) got the ball rolling with what was a mixed quarter and the expectation for higher expenses in the new year.
That said, the bank saw positives in multiple areas and should see a benefit from expected higher interest rates in 2022. Let’s take a deeper look into the company’s quarter and outlook.
Earning highlights
JPMorgan reported fourth-quarter and full year results on Jan. 14. For the quarter, revenue fell 3% to $29.3 billion and was $520 million below what Wall Street analysts had anticipated. GAAP earnings per share of $3.33 was a 46 cent, or 12%, decline from the prior year. Results were 33 cents ahead of estimates.
For the year, JPMorgan's revenue grew 2% to $122 billon with earnings per share of $15.25 compared to $10.13 for 2020. Earnings per share for 2020 were greatly impacted by the Covid-19 pandemic, which skews the year-over-year growth numbers.
For the quarter, the release of provisions for credit losses (PCLs) on the balance sheet were a benefit of $1.29 billion, adding 47 cents to the per-share result.
Consumer and Community Banking was the weakest segment within the company as revenue fell 4% to $12.3 billion. Consumer and Business Banking improved 7% due to higher asset management fees, but Home Lending fell 26% and Card and Auto declined 9%. PCL was a $1.1 billion benefit.. Noninterest expense increased 10% due to higher capital spending.
Corporate and Investment Bank revenue grew 2% to $11.5 billion. This was due to an 8% increase in banking revenue, led by a 37% surge in advisory fees, a 36% increase in lending and a 26% improvement in payments. This gains were offset by a 13% decrease in Markets and Securities Services, due to weakness in fixed income. PCL was a $126 million benefit due to reserve releases.
Commercial Banking grew 6% from the previous year to $2.6 billion, primarily on account of higher investment banking activity. Net income was down almost 40% due to lower credit reserve released this time around.
Asset and Wealth Management was the best performer as revenue improved 16% to $4.5 billion. Higher management fees and a 17% increase in average deposits were highlighted as areas of strength. Assets under management grew 15% to $3.1 trillion due to higher inflows and market levels, while client assets were up 18% to $4.3 trillion.
Prior to the earnings release, JPMorgan had been expected to earn $12.04 per share in 2022. These numbers could change following the quarter, but for now shares trade with a forward price-earnings ratio of just over 13 times expected earnings.
Takeaways
The thing most investors will likely focus on is the company’s increase in expenses, primarily due to higher wages for employees and investments in business. Noninterest expense for the quarter was up 11% year-over-year and 5% quarter-over-quarter. Expenses were higher by nearly 5% for 2021. This is a pain that is likely to continue for a while given the tight labor market and skyrocketing inflation. In fact, the company expects this to persist for some time as it guided towards expenses of nearly $77 billion for 2022, which would be an 8% increase from last year. A two-year stack rate in the double-digits for expenses is not an insignificant amount.
Looking at the individual segments, the Consumer and Community Banking business did drag down results. That said, the sequential decline was just 2%, half of what the total for the year. Home lending was less of a drag on results and revenue from Card and Auto improved 7%. Results were also dragged down by a lower release of PCLs..
There were some positive points. Three out of four major segments showed year-over-year growth. PCL releases also show that the bank’s loan portfolio remains very strong. Deposits were up a high teens percentage and topped $3 trillion. The company holds the top spot in retail deposit market share in the U.S. as a result. Client assets and assets under management were up double-digits as well.
Net interest income was up 3% during the quarter, with just one segment showing a decline. For the year, net interest income did fall 4%, but this is an area that JPMorgan is likely to see growth in this year. Most market observers are predicting at least three and possibly four rate hikes from the Federal Reserve in 2022, with a similar number next year as the Fed employs the tools at its disposal to combat inflation. Leadership expects that net interest income will be higher by double-digits to $50 billion for the year.
JPMorgan also has one of the best balance sheets in the industry. The Tier 1 capital ratio improved 10 basis points sequentially, but fell 10 basis points from the same period of 2020. Still, the ratio was a strong 13%. Total assets were flat from the third-quarter of the year, but up close to 11% compared to the prior year.
Final thoughts
The combination of the revenue miss, the reserve release-aided earnings beat and guidance for higher expenses has, not surprisingly, sent shares of JPMorgan lower. The stock was down more than 6% at one point in the early trading session and is currently lower by 5% as as of the writing of this article.
The quarter was definitely mixed, with the guidance for increased expenses quite high. But not every aspect of the company demonstrated poor results. Most segments had higher revenue and JPMorgan continues to own one of the best balance sheets in the industry. Plus, interest income should move meaningfully higher over the next two years. Shares also have a dividend yield of 2.5%, which is nearly twice the average of the S&P 500 Index.
For these reasons, I will maintain my long position in JPMorgan despite issues seen in the quarter.
