Key Takeaways

  • EPS was $1.38 vs. the $1.08 analysts expected.
  • Revenue was higher than expected as trading revenue soared due to market volatility.
  • Net interest margins were lower than expected.

What Happened

JPM reported significantly higher-than-expected profits for Q2 2020. Trading revenue surged, as the volatile markets helped provide a revenue source to boost revenue above analysts' expectations. This was especially important because net interest margins declined by even more than expected, as the Fed's decision to drop interest rates has pressured banks across the board. JPM's stock is up by 1.2% today at time of writing.

(Below is Investopedia's original earnings preview, published July 13, 2020)

What to Look for

JP Morgan Chase & Co. (JPM), by far the largest U.S bank with a $290 billion market value, is regarded as a bellwether for the financial services industry and the broader economy. The bank's outlook has darkened significantly this year. JPMorgan's stock is down more than 30% off its 2020 high as the spreading COVID-19 crisis has shut down large parts of the U.S. economy, badly hurting JPMorgan and the entire banking industry. In an unusually bleak forecast, JPMorgan in April said that GDP could fall 40% in Q2.

Investors will closely watch how these developments are affecting JPMorgan when the bank reports earnings on July 14 for Q2 FY 2020. For the quarter, analysts expect earnings per share (EPS) to plunge for the second straight quarter even as revenue rises compared to the same quarter a year ago.

Another focus of investors will be JPMorgan's net interest margin, which measures the difference between the net interest income JP Morgan earns on its loans and the outgoing interest it pays to customers for money, including holders of savings accounts. That margin is expected to fall to 2.18% from 2.49% in Q2 FY 2019.

These trends have had a major impact on JPMorgan's stock performance. While the stock rose sharply in the second half of 2019 amid a robust economy, it has plunged this year. As a result, the stock has substantially underperformed the broader stock market, posting a total return of -11.8% compared to 6.4% for the S&P 500.

JPM vs. S&P 500 1-Year Performance
Source: TradingView.

On April 14, JP Morgan reported that earnings per share for Q1 FY 2020 plummeted 70.4%, the first EPS decline in nine quarters. EPS drastically missed analyst estimates.  Revenue also fell by 3% year over year (YOY). The biggest news from the Q1 earnings release was the bank’s decision to add $6.8 billion to its loan loss provisions. CEO Jamie Dimon said the additions to loss reserves were needed to pay for potentially costly defaults throughout the company’s vast loan portfolio.

Looking at JPMorgan's Q2 performance in recent years, EPS growth has been strong. EPS growth has ranged from of 17.9% in FY Q2 2017 to 22.9% growth in Q2 2019. By contrast, in Q2 FY 2020 analysts expect EPS to decline by 61.7% even as revenue rises by 3.5% compared to a year ago.

JPMorgan Chase Key Metrics
  Estimate for Q2 2020 Q2 2019 Q2 2018
Earnings Per Share ($) 1.08 2.82 2.29
Revenue ($B) 29.8 28.8 27.8
Net Interest Margin (%) 2.18 2.49 2.48

One of the most important metrics for investors to look at when assessing JP Morgan’s earnings is its net interest margin. In order to be profitable, banks must ensure they can consistently lend out money at higher rates than what they pay for their own source of funds. Net interest margin is a key gauge that indicates how much a bank can profit and thrive longterm, and helps investors determine whether to own the company's shares. In 2020, banks' net interest margins have been under enormous pressure as the Federal Reserve and central banks globally have slashed rates in an attempt to buoy the economy. However, the weak economy is boosting job losses, making it more difficult for banks to charge higher interest rates on some products.

Amid a strong economy, JPMorgan's net interest margin increased from 2.33% in Q1 FY 2017 to a peak of 2.57% in Q1 FY 2019. But in the three quarters from Q3 FY 2019 to Q1 FY2020, net interest margins have declined YOY.

Analysts expect this performance to get worse in Q2 FY 2020. If analysts are correct in their consensus estimate of a 2.18% net interest margin in Q2 FY 2020, that would be the lowest margin posted by JP Morgan in at least 14 quarters.