JPMorgan Chase shares dipped Friday after the bank posted its smallest quarterly earnings beat in nearly two years and the lender’s CFO lowered guidance on companywide returns.
Here are the numbers:
Earnings: $3.33 a share, vs. estimate $3.01, according to Refinitiv.
Revenue: $30.35 billion, vs. estimate $29.9 billion.
Shares of the bank dropped 5.2% in early trading. JPMorgan said in its release that it took a $1.8 billion net benefit from releasing reserves for loan losses that never materialized; without that 47 cent per share boost, earnings would have been $2.86 per share.
CFO Jeremy Barnum told reporters on a conference call that management expected “headwinds” of higher expenses and moderating Wall Street revenue to cause the company’s returns to dip from recent years. That means it’s likely the bank will miss the firm’s 17% target for returns on capital, he said.
“Over the next one to two years, we expect to earn modestly below that target as the headwinds likely exceed the tailwinds,” Barnum said, adding that the goal is still valid over the “medium term.”
JPMorgan will see expenses climb 8% to about $77 billion in 2022, Barnum added, driven by “inflationary pressures” and $3.5 billion in investments.
When asked if a tight labor market was forcing JPMorgan to pay its personnel more, Barnum had this response: “It is true that labor markets are tight, that there’s a little bit of labor inflation, and it’s important for us to attract and retain the best talent and pay competitively according to performance.”
Nevertheless, the bank will benefit from the rising interest rates and loan growth that have attracted investors to the financial industry in recent months. Net interest income is likely to hit roughly $50 billion this year, a gain of $5.5 billion from 2021 on the anticipated rates and “high single digit” loan growth, Barnum said.
After setting aside billions of dollars for loans losses earlier in the pandemic, JPMorgan has benefited as it steadily released the funds as borrowers held up better than expected. Still, CEO Jamie Dimon has said he doesn’t consider the accounting benefit a core part of business results. Even when including the boost, JPMorgan posted the smallest earnings beat in the past seven quarters.
“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks,” Dimon said in the release. “Credit continues to be healthy with exceptionally low net charge-offs, and we remain optimistic on U.S. economic growth.”
While companywide revenue rose a modest 1% in the quarter to $30.35 billion as a slowdown in markets revenue was offset by robust investment banking fees, non-interest expenses shot up 11% to $17.9 billion on rising compensation costs, the bank said. That was higher than the $17.63 billion estimate of analysts surveyed by FactSet.
JPMorgan executives have previously talked about the need to invest in technology and pay employees after a booming year on Wall Street; still, analysts may ask management about the trajectory of expenses this year.
“JPMorgan’s results were surprisingly weak and were hampered by uncharacteristically poor expense management,” Octavio Marenzi, CEO of consultancy Opimas LLC, said in an emailed statement.
Government stimulus programs during the pandemic left consumers and businesses flush, resulting in stagnant loan growth and prompting Dimon to say last year that loan growth was “challenged.” But analysts have pointed to a rebound in the fourth quarter, driven by demand from corporations and credit card borrowers.
JPMorgan chief operating officer Daniel Pinto said last month during a conference that fourth-quarter trading revenue was headed for a 10% drop, driven by a decline in fixed income activity from record levels.
Trading revenue slowed slightly more than that, dropping 11% to $5.3 billion in the quarter, the bank said. That was driven largely by a slowdown on bond trading desks. Investment banking helped with a 37% jump in investment banking fees.
The bank was forced to pay $200 million in fines last month to settle charges that its Wall Street division allowed workers to use messaging apps to circumvent record keeping laws.
Analysts may also ask the bank about the impact of its recent decision to rein in overdraft fees. JPMorgan said last month that it would give customers a grace period to avoid the punitive fees, a move that along with other changes will have a “not insignificant” hit to revenue.
Shares of JPMorgan have climbed 6.2% this year before Friday, lagging the 11.6% rise of the KBW Bank Index.
This story is developing. Please check back for updates.