JP Morgan Chase reported results on Friday that exceeded analysts' forecasts and helped temporarily calm the mood of investors worried about the health of the U.S. economy, of which the banking sector is the litmus test. The surprisingly strong performance of the largest U.S. bank in terms of assets held was influenced by interest rate hikes, which helped generate higher interest income. Key results are as follows:
Revenue: $33.49 billion vs. estimates of $32.1 billion (Refinitiv)
Earnings per share (EPS): $3.12 versus estimates of $2.88 (Refinitiv)
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Open account Try demo Download mobile app Download mobile app- The bank said third-quarter earnings fell 17% from a year ago to $9.74 billion, or $3.12 per share, as the company made additional provisions of $808 million to cover bad loans. Excluding 24 cents per share related to losses on investment securities, the bank reported earnings per share (EPS) of $3.36, easily exceeding analysts' estimates.
- Revenue rose 10% to $33.49 billion, with the notable figure being net interest income, which rose 34% to $17.6 billion thanks to higher interest rates and a growing loan portfolio. This result exceeded analysts' expectations by more than $600 million.
- However, a significant risk factor weighs over the banking sector. Raising interest rates favors the banking sector only up to a certain point, translating into an increase in interest income on loans. Above a certain level, the cost of risk - the likelihood that borrowers will default - begins to rise. Analysts have been concerned about the impact the slowing economy will have on the bank. It is estimated that if the US unemployment rate rises to 5-6%, the bank will likely have to increase its loan loss provisions by about $5-6 billion over several quarters, JPMorgan CEO Jamie Dimon said on a conference call Friday.
- Despite the banks' surprisingly strong performance, which can be considered a litmus test of the U.S. economy, investors are concerned that the Fed may inadvertently trigger a recession. Revenues from investment banking and mortgages have fallen sharply, and companies may reveal write-downs due to a decline in financial assets.
- Moreover, investors expect that banks may increase loan loss provisions as fears of a recession intensify; according to analysts, the six largest U.S. banks by assets are expected to set aside a total of $4.5 billion in provisions.
- The above market expectations seem to be confirmed by Dimon's balanced statement this week that he expects a US recession to occur in the next six to nine months.
- All in all, it seems that the better-than-expected results of the largest U.S. banks testify not so much to the exceptionally good health of the banking sector, but to the exceptionally pessimistic mood of stock market analysts, who, preparing for the risk of an impending recession, are setting the market consensus at an aseffectively low level. However, this may provide an opportunity for short-term increases, as we have seen in the past week.
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