Shares of the largest U.S. bank fell 6.5% after it provided guidance that disappointed investors.
As multiple U.S. banks begin their first-quarter earnings season, investors are paying particular attention to the nation's largest banks. JP Morgan Chase (JPM 0.06%). The bank beat analysts' top and bottom line estimates on several metrics. Despite this, the stock price fell 6.5% after Friday morning's earnings release.
Here are four things investors should know about JPMorgan's earnings report.
1. Net interest income outlook is disappointing
JPMorgan Chase & Co. had solid first-quarter revenue with sales of about $42 billion and net income of about $13.4 billion, up 9% and 6%, respectively, from a year earlier.
The bank's net interest income (NII), the difference between income from interest-earning assets less expenses from interest-bearing debt, rose 11% year over year in the first quarter but fell 4% compared to the fourth quarter. did. The bank's NII decreased quarter-on-quarter due to margin compression and a decline in deposit balances.
“We expect NII costs and credit costs to continue to normalize,'' said JPMorgan Chase CEO Jamie Dimon. The bank expects to invest $90 billion in NII for the year, consistent with previous guidance. But investors expected the bank to raise its full-year NII by $2 billion to $3 billion, contributing to the share price decline.
2. Increase in investment banking fees
After a brutally hot 2021, initial public offerings (IPOs) and corporate bond issuance have fallen off a cliff. Rising interest rates and market volatility have weighed on these activities, but businesses are now adapting to the higher interest rate environment. Dimon said “IPO performance is improving,” but the bank remains “somewhat cautious” about its outlook this time.
Early signs point to a recovery in investment banking, which could be great for JPMorgan and other companies with large investment banking operations. JPMorgan's investment banking revenue rose 21% to $2 billion in the quarter due to higher debt and equity underwriting fees.
3. Consumers are resilient, but worth monitoring.
Another common theme over the past few years is consumer resilience. Many experts predicted a recession in 2023 or 2024, but strong consumer spending kept it from happening. “Consumers remain economically healthy, supported by a resilient labor market,” Dimon told investors.
Bank investors will want to continue monitoring credit metrics that can provide further insight into consumer health. JPMorgan's Consumer and Community Banking (CCB) division reported a credit card services net charge-off rate of 3.32%, up from 2.79% in the fourth quarter of 2023 and 2.07% in the third quarter.
Pay attention to consumer delinquency. JPMorgan's 30-day delinquency rate for credit card loans increased from 2.14% in the fourth quarter of 2023 to 2.23% in the first quarter of 2024.
Image source: Getty Images.
4. JPMorgan's capital base remains strong
JPMorgan is one of the best-run banks in the United States, as evidenced by its capital ratio. One of the key metrics in the banking industry is the Common Equity Tier 1 (CET1) ratio. CET1 compares a bank's capital and assets to show how well it can absorb financial shocks. JPMorgan's CET1 ratio of 15% continues to be among the highest in its peer group and outperforms its peer group. citygroup (13.5%) and wells fargo (11.2%) was also reported on Friday.
JPMorgan's strong capital base provides the flexibility and capital to reinvest in growth and maintain an attractive capital return portfolio. JPMorgan has been prudent in managing its balance sheet, so it has maintained good performance relative to its peers even in an environment of rising interest rates.
Investors should not change course
JPMorgan Chase's earnings were strong, but the stock was sold anyway. One possible reason is that the stock price has soared, up 45% from its October low. As of the latest financial results announcement, the bank's valuation was approximately 2.5 times its tangible book value (TBV), the highest valuation in the past 10 years.
Given the higher valuation, it's no wonder the stock has taken a breather here. After the recent sell-off, the bank's TBV is trading at around 2.22x, above the 10-year average of 1.85x.
JPM Price vs. Tangible Book Value data by YCharts.
Despite the decline, JPMorgan Chase remains one of the best bank stocks investors can own. Strong capital ratios and a strong balance sheet allow the bank to be flexible no matter what the economy throws at it. Shareholders should continue to follow bank stocks, and this has been proven time and time again.
Citigroup is an advertising partner of The Motley Fool's Ascent. Bank of America is an advertising partner of The Motley Fool's Ascent. Wells Fargo is an advertising partner of The Motley Fool's Ascent. JPMorgan Chase is an advertising partner of The Motley Fool's Ascent. Courtney Carlsen has no position in any stocks mentioned. The Motley Fool has positions in and recommends Bank of America and JPMorgan Chase.The Motley Fool has a disclosure policy.
