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Chase Posts Better-than-Expected Results; Outlook Cautious

JPMorgan Chase & Co. (NYSE: JPM – $107.31) said it earned $2.34 a share in the third quarter, compared with $1.76 in the year-earlier period and Street estimates of $2.20. Net interest income rose 7%, driven by higher interest rates and healthy loan and deposit growth. Non-interest revenues increased only 3%, with markdowns on certain private equity investments offsetting some of the growth in auto lease and debt market-related revenues. Expenses grew a little faster than revenues, reflecting investments that JPMorgan are making in its businesses, higher compensation and auto lease depreciation. Credit costs remained low and the company released some of its reserves for consumer loan losses. As in the first half, results benefited from the reduction in the corporate tax rate and a lower share count. By business lines:

  • Consumer & Community Banking segment generated nearly half of the company’s net income. Not surprisingly, Home Lending revenues declined 16%, driven by lower mortgage servicing revenues and margin compression. But the rest of the segment benefited from wider deposit margins, strong card and auto lease volume and lower card-acquisition costs. The company released $250 million of mortgage loan loss reserves but added $150 million to its reserves for credit card losses.
  • The Corporate & Investment Bank segment registered a slight increase in net income, but results fell short of net income in the first half of the year, mostly owing to lower debt and equity markets revenues. On a year-to-year basis, growth in equity markets and investment banking revenues offset the decline in the fixed income area. Expenses, up 8%, outpaced revenue growth, reflecting investments in technology and new hires. 
  • Meanwhile, Commercial Banking results increased nicely despite some migration of deposits to higher-yielding investments. Deposit margins expanded, and recoveries of previously charged-off loans offset credit losses. And Asset & Wealth Management profits rose 7%, aided by a similar increase in assets under management.

       Looking ahead, the company, like all banks, isn’t immune from economic trends and the sector has been under pressure of late thanks in part to a slower growth outlook. But Chase appears optimistic about prospects for business activity in the United States and loan growth. The company has strong market shares in the credit card and investment banking arenas. Expenses probably will remain high in the new year, owing to the ongoing heavy spending for technology, new branches (in new markets, like Philadelphia), and labor. But revenues should benefit from the heavy investment. In all, JPM’s share estimate for 2018 is $9.20 and $9.98 is in the cards for next year. And recent dividend increases now yield investors a handsome 3% annual yield.

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