Analysis: JPM GS

Friday morning, before the opening bell, JPMorgan Chase (JPM) reported a top and bottom-line beat with its first-quarter 2019 results. On the top line, managed revenues of $29.85 billion (+4.6% YoY), beat expectations of $28.44 billion and on the bottom line, diluted earnings per share of $2.65 (+11.8% YoY), exceeded estimates of $2.35 per share.

Looking to several key bank-wide metrics, the bank's interest-rate spread ticked higher sequentially to 2.225%, and the all-important net yield on interest-earnings assets (net interest margin or "NIM") was in-line to slightly better than expectations at 2.56% (+2 basis points quarter over quarter). This was a great result and proved that the firm can remain net interest profitable despite the flatter yield curve, a dynamic in which the bank's routinely sell off on.

On a managed basis (which makes for an apples-to-apples compare versus estimates), JPMorgan reported an overhead (or "efficiency") ratio (operating expenses/revenue) of 55% (down one percentage point year over year), a better result against expectations of 58.5% (recall, on this front, lower is better as it essentially indicates the cost of revenue.

At an impressive 19%, return on tangible common equity (ROTCE) bounced back from the poor fourth-quarter result (14%) in a big way and topped the roughly 18% estimates we saw. This should help the bank regain some of the price to book multiple that has been lost. Meanwhile. the bank's common equity tier 1 (CET1) ratio, which compares core equity capital to total risk-weighted assets and is a measure of financial strength, came in at 12.1% which is in line with expectations. This figure was firmly above the Fed's required 4.5% minimum and indicative of a strong financial position that provides room for additional business investments, shareholder returns and a solid buffer against an economic downturn.

Additionally, the bank's tangible book value per share (TBVPS), which is a measure of book value less goodwill and other intangible assets, came in at $57.62 (+6.6% YoY), above expectations of $56.80 and up from $54.05 in the same period last year.

On the capital return front, JPMorgan returned a total of $7.4 billion to shareholders, with $4.7 billion coming in the form of share buybacks and the remainder via a common dividend of $0.80 per share.

Consumer & Community Banking

Within the Consumer & Community Banking division, revenues of $13.751 billion (+9% YoY) outpaced expectations of $13.585 billion, leading to segment income of $3.963 billion. On another positive note, average loans and core loans were up 1% and 4% YoY, respectively. Also driving the top line was a 3% YoY increase in average deposits. Active mobile customers also increased, advancing 11% from the same period last year as the bank continues to invest in its digital efforts.

However, slightly offsetting the rise in revenue, expenses increased 4% YoY on the back of business investments, and higher auto lease depreciation that was only partially offset by expense efficiencies and lower FDIC charges.

Breaking the top line down further, JPMorgan generated revenues $6.557 billion (+15% YoY) within Consumer & Business Banking, $1.346 billion (-11% YoY) within Home Lending, and $5.837 billion (+9% YoY) from Card, Merchant Services & Auto operations, which was pushed higher by Card net interest income on loan growth and margin expansion, as well as higher auto lease volumes.

Corporate & Investment Banking

Moving on to Corporate & Investment Banking, revenue of $9.848 billion (-6% YoY) was a surprise beat against the $9.519 billion consensus and resulted in net income $3.251 billion (-18% YoY). Although the results are down year over year, it was a significant improvement from the disastrous fourth-quarter result.

Breaking top-line revenue down further, the bank saw an increase in Banking revenue to $3.232 billion (+7.5% YoY) more than offset the decrease in net revenues from Total Markets & Investor Services to $6.616 billion (-11.5% YoY).

Within Total Banking, Investment Banking revenue came in at $1.70 billion (+10% YoY), "with overall share gains, reflecting higher advisory fees partially offset by lower underwriting fees." As for Treasury Services, revenue improved to $1.1 billion (+3% YoY), driven by balance and fee growth, partially offset by deposit margin compression. Lending revenue also came in higher, advancing 13% from the same time last year to $340 million. As for some overall highlights, the firm maintained its #1 rank in Global IB fees during the quarter, while debt writing revenue increased to $935 million (+21%) and advisory revenue grew to $644 million (+12% YoY). As we look forward, management pointed out that equity underwriting fees should bounce back in the second quarter due the large number of U.S. IPOs. Remember, one way to play the slew of big IPOs this year are the big banks like JPMorgan and Goldman Sachs (GS) .

As for Markets & Investor Services, revenues fell to $6.6 billion (-12% YoY). Within this business, Markets revenue was $5.5 billion (-17% YoY) due to lower Fixed Income and Equities Market revenue, which, as a reminder, both make up trading and was well understood to be weak this quarter. Digging deeper, Fixed Income Markets revenue fell to $3.7 billion (-8% adjusted YoY) due to lower activity, particularly in rates and in Currencies & Emerging Markets, which normalized after a strong 2018. Despite the continued down prints in FICC, this result was pleasantly better than expected. Equity Markets revenue was $1.7 billion (-13% adjusted YoY) driven by lower client activity, especially in derivatives. Securities Services revenue fell to $1 billion (-4% YoY) due to fee and margin compression, lower market levels, and the impact of a business exit, offset by client activity.

Commercial Banking

Commercial Banking revenues of $2.338 billion (+8% YoY) slightly edged expectations of $2.332 billion, leading to $1.053 billion in net income. Breaking this revenue down further, Middle Market Banking revenue increased slightly year over year to $951 million, Corporate Client Banking revenue grew year over year to $816 million, while Commercial Real Estate Banking revenue fell slightly to $547 million. The bank also hit record IB revenue of $818 million, up 44% YoY driven by large transaction.

Asset & Wealth Management

Within Asset & Wealth Management, revenues of $3.489 billion (down 17 million YoY) missed expectations of $3.729 billion. Meanwhile, net income of $661 million was down 14% year over year. Driving the lower results year over year was lower management fees due to lower average market levels, lower brokerage activity, offset by higher investment valuation gains. The firm ended the quarter with Assets Under Management (AUM) and client assets of $2.9 trillion, both up 4%. Meanwhile, average loan balances increased 10% YoY to $145 billion, and average deposit balances fell 4% YoY to 138 billion.

Dimon's Economic View

In support of solid print, CEO Jamie Dimon provided a positive view on the U.S. economy in the company's press release. "In the first quarter of 2019," Dimon said in the press release, "we had record revenue and net income, strong performance across each of our major businesses and a more constructive environment. Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong." Dimon's remarks should ease concerns about the economy and decrease fears of an imminent recession.

Bottom Line

This was a very positive quarter for the bank, and the stock's push higher today reflects this. After a rare earnings miss last time around that broke the firm's streak of 15 consecutive beats, we are pleased to see JPM restart a streak today. We like where the upside came from (net interest margins, Investment banking, an ROTC above medium-term guidance, and lower costs), and this should help dispel fears that the bank can't drive profits in what is thought to be a difficult environment. Meanwhile, management reaffirmed its target to deliver net interest income above $58 billion in FY2019 (market dependent), even though the yield curve has flattened.

Members interested in reviewing the earnings material may do so here.