JPMorgan gets lift from investment bank, offsetting jump in credit costs

Jeenah Moon/Bloomberg

JPMorgan Chase's second-quarter earnings report highlighted the diverging fortunes of Main Street and Wall Street, as mounting credit costs highlighted consumer struggles, but the megabank also got a revenue boost from an investment banking boom.

High interest rates and inflation continued to put pressure on the country's largest bank, which kicked off bank earnings season on Friday. While JPMorgan enjoyed a 50% surge in investment banking fees from the previous year, a steady rise in credit card charge-offs put a drag on its profits.

Still, Chief Financial Officer Jeremy Barnum said the bank isn't worried about the health of the consumer, calling the rise in credit costs "not a very interesting story." JPMorgan increased its provisions for credit losses in the second quarter to $3.1 billion, up from $1.9 billion in the prior quarter, as it charged off bad loans and added to its coffers in case of more.

"When it comes to card charge-offs and delinquencies, there's just not much to see there," Barnum said on a call with analysts. "It's normalization, not deterioration. It's in line with expectations."

He said during a separate call with reporters that the rise in losses was driven by "robust client acquisition, very low attrition" and "high client engagement." JPMorgan is the largest credit card issuer in the country, and it has been open recently about its efforts to gain even more market share.

The bank posted a credit card net charge-off rate of 3.5%, up from 2.4% the prior year. Although the higher credit costs raised eyebrows, JPMorgan largely maintained its 2024 guidance on key metrics. The company's forecast for full-year net interest income was unchanged at $92 billion, as was its full-year expense estimate of $91 billion. It now forecasts that its card services net charge-off rate, which it originally pegged at less than 3.5% for the year, will be 3.4%.

Scott Siefers, an analyst at Piper Sandler, said in an interview that the $4.1 trillion-asset bank's earnings looked solid. He drew encouragement from the company's steady full-year guidance, and he argued that the credit "normalization" during the second quarter doesn't signal any larger overarching issues.

"I think they're just being appropriate with their reserve building, particularly given that [the] credit card [business] has been a growth area for them," Siefers said. "So you just need to keep pace with that balance sheet growth."

The bank reeled in $13.1 billion of net income in the second quarter, which marked a slight drop from the first quarter, excluding a massive windfall that it collected in May by cashing in Visa shares.

JPMorgan's common equity tier 1 capital ratio was 15.3% at the end of the quarter, which was well above the required minimum, safeguarding the bank's reputation for what JPMorgan executives call its "fortress balance sheet."

Investment banking gave JPMorgan a lift, as equity capital markets and mergers and acquisitions began to wake up after a lull amid rate rises. Barnum said on the earnings call that dialogue in those spaces is robust, but activity has largely been driven by refinancing, as opposed to new deals.

Although the trend is encouraging, initial public offerings and debt capital markets still have a ways to go, he added, in part because of the muted performance of tech stocks and a regulatory overhang.

When the stock market opened on Friday, JPMorgan's share price fell by 2%, and it was down by about 1%-2% throughout the day.

Two other megabanks that reported earnings on Friday — Citigroup and Wells Fargo — also showed some signs of credit card stress. Wells' net charge-off rate for credit cards hit nearly 5%, and card losses at Citi drove a 39% year-over-year increase in credit costs across all loan products.

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Edward Jones analyst James Shanahan wrote in a research note that JPMorgan's credit performance was strong compared to those of its peers. Shanahan, who maintained his "buy" rating for JPMorgan, argued that the bank is well-positioned to "compete throughout the economic cycle."

At not only JPMorgan, but also Citi and Wells, credit card delinquency rates dropped slightly from the previous quarter, which supports Barnum's confidence in the health of U.S. consumers.

JPMorgan Chairman and CEO Jamie Dimon, who was traveling overseas and not present on the earnings call, said in a prepared statement that inflation and interest rates may "stay higher than the market expects," even as the Labor Department reported inflation data on Thursday that was widely viewed as positive.

"While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks," Dimon said.

Siefers described Dimon's comments as characteristically conservative.

"With JPMorgan, you always know that you're going to get a situation where they are thinking about what could go wrong, rather than hoping everything goes right," Siefers said. "You're always going to get a conservative outlook, which leaves a little on the table should things pan out better. In other words, not everything always has to go right for them to do well."