JPMorgan Earnings to Reflect Preparation for Potential Loan Losses

Largest U.S. bank's shares have surged as key profit metric improves

JP Morgan Chase building

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Key Takeaways

  • JPMorgan Chase, the largest U.S. bank, likely will report a $3.5 billion swing in money set aside in the fourth quarter for potential credit losses.
  • At the same time, JPMorgan Chase's net interest margin likely increased for the fifth straight quarter to pre-pandemic levels.
  • JPMorgan's stock surged in the fourth quarter, capping a year of broader market outperformance.

JPMorgan Chase (JPM), the largest U.S. bank, probably will say earnings slid in the fourth quarter as it prepared for a weaker economy by boosting provisions for potential credit losses.

The bank is expected to report Friday that its net income fell 8% to $9.1 billion, or $3.09 per share, according to estimates from Visible Alpha, even as revenue rose 15% to $34.9 billion. The company earned $9.9 billion, or $3.33 per share, on revenue of $30.4 billion in the same quarter a year ago.

JPMorgan Chase Key Stats
 Q4 2022 (Est)  Q4 2021  Q4 2020
Adjusted EPS $3.09 $3.33 $3.79
Revenue  $34.9B  $30.4B  $30.2B
Net Interest Margin  2.3%  1.6%  1.8%

Source: Visible Alpha

Like many lenders, JPMorgan has benefited from rising interest rates and its net interest margin — the difference between the money it earns on loans and the amount it pays on deposits — probably increased for the fifth straight quarter. Yet rising rates have slowed the U.S. economy, raising the specter of recession and leading banks to set aside more assets to cover potential loan defaults.

Visible Alpha projects JPMorgan set aside $2.2 billion to cover loan losses in the quarter. That would represent a $3.5 billion swing from last year, when the company reduced its credit-loss provision by $1.3 billion, boosting quarterly profit.

Even so, JPMorgan shares rose 29.4% in the fourth quarter, compared with a 7.1% gain for the S&P 500 Index. That capped a year in which the stock fell 12.6%, compared with S&P 500's 19.4% loss.

The sheer size of JPMorgan's asset base—its $3.4 trillion exceeds No. 2 Bank of America by 39%—insulates it from economic turmoil that hurst smaller banks more. As a whole, U.S. bank stocks underperformed the S&P 500 in 2022.

Higher rates have helped JPMorgan boost its net interest margin, reaching an anticipated 2.3% in the fourth quarter, up from 1.6% a year ago, according to Visible Alpha estimates. That would mark the bank's highest net interest margin since the first quarter of 2020, just prior to the onset of the pandemic.

Looking Ahead

That trend will probably stretch into 2023. In a recent report, Goldman Sachs predicted the banking industry's net interest income will increase by 11% this year as the Federal Reserve continues boosting its benchmark federal funds rate. The Fed's latest median forecast sees that rate rising to 5.1% this year from 4.25% to 4.5%.

Goldman Sachs also noted that large banks such as JPMorgan can weather, better than smaller lenders, the increased capital requirements a recession might bring. Those regulatory requirements safeguard the economy from bank failures but also reduce banks' earnings.

Investors will parse JPMorgan's earnings report Friday for any insight into the prospects for loan demand this year, how inflationary pressures and the impact on consumers' liquidity may affect deposits, and how economic uncertainty may affect the firm's capital spending plans. Goldman noted the company has opened operations in 500 new markets in just the past five years.

JPMorgan gained market shared through its expansion, Goldman analysts wrote in the note. "(We) see further opportunities to expand in high- growth markets, which in our view positions them well to continue taking share across a wide range of products."

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  1. U.S. Federal Reserve Board. "Large Commercial Banks."

  2. "U.S. Bank Stocks Falter as Recession Worries Take Hold."

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