JPMorgan Chase’s fourth-quarter earnings beat expectations as the largest US bank benefited from busy capital markets, though it faced higher expenses and slower trading activity.
The banking powerhouse posted a profit of $10.4 billion in the last three months of 2021 on revenue of $30.3 billion. This brought earnings per share to $3.33. Wall Street was expecting profits of $9.1 billion, or $3.01 per share, on revenue of $29.8 billion, based on analysts surveyed by FactSet.
Jamie Dimon, the bank’s president and chief executive officer, said in a statement: “JP Morganchase reported solid results in our businesses benefiting from higher capital market activity and lending activity, as the firm’s average debt increased by 6%. had increased.”
Revenue in the group’s investment banking division grew 28% from the fourth quarter of 2020 to $3.2 billion, driven by higher fees. “Unprecedented” merger and acquisition activity and strong performance of initial public offerings provided another boost.
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The slowdown in trading activity somewhat dampened the quarter’s earnings brightness. Market revenue fell 11% to $5.3 billion after last year’s record quarter. The bank said it had a challenging trading environment in rates with short selling in derivatives and 2% decline in equity markets.
Higher-than-expected costs were also a deterrent: The bank reported expenses of $17.9 billion in the quarter, mainly due to compensation and spending on marketing and technology. JPMorgan expects full-year spending to rise nearly 9% to $77 billion in 2022 — a figure that Wall Street wanted to see.
Although earnings were strong, higher expense guidance and lower trading revenue could weigh on the stock following recent outperformance.
“Bottom line: It’s not in line with the investors’ beat and rise for banks in 2022,” said Erica Najarian, an analyst at UBS.,
Shares of JPMorgan (ticker: JPM) fell more than 4% in premarket trading after financial results were released. The stock was up about 1% before earnings were posted.
Post-earnings stock declines aren’t unusual: JPMorgan stock has declined on each results day for the past five quarters. These continued declines come even as the profits of each of those days topped Wall Street’s expectations for the bank’s performance.
Shares of major banks have fallen recently amid a strong economy and a tight monetary policy environment. JPMorgan stock has climbed nearly 7% in the past month alone, beating a broad 1.1% rise S&P 500 index.
“The economy is performing fairly well despite constraints related to inflation and supply chain constraints,” Dimon said. “We remain optimistic on US economic growth as business sentiment is upbeat and consumers continue to benefit from job and wage growth.”
The Federal Reserve agrees with Dimon about the state of the economy, and is calling off pandemic-era stimulus and setting financial conditions to normalize, including raising interest rates. Tighter Fed policy, along with higher inflation, has lifted bond yields and sharpened the yield curve, reflecting a greater gap between short-term and long-term bond yields.
Higher returns or interest rates are good for banks, as it gives them wider margins – and thus, larger profits – when lending money. Banks charge more for loans than for deposits, so margins come under pressure in an ultra-low-rate environment.
Net interest income was higher in the most recent quarter than a year ago, and ahead of expectations. Marking the difference between interest income and expenditure, it is a fundamental measure of the profitability of banks. Wall Street was looking for quarterly net interest income of $13.1 billion; JPMorgan delivered $13.7 billion, up 3% from a year ago.
The bank said it expects net interest income of $50 billion in 2022, excluding its fixed income and equity market divisions, up from $44.5 billion in 2021. This is higher than what analysts expected.
Friday’s results bring net income for the full year to $48.3 billion, up from $29.1 billion in 2020, but quarterly figures indicate a decline from the same period in the prior year. JPMorgan’s fourth-quarter 2021 profits were down 14% compared to 2020, when the bank posted earnings of $12.1 billion, or $3.79 per share.
Lower profit in the latest quarter compared to a year ago, along with higher expenses, can be attributed to a smaller release of loan loss reserves in the recent quarter.
As Covid-19 ravaged the world in 2020, banks set aside billions in reserves for credit losses that were expected to come with the economic fallout from the pandemic. When the economic reality was not as bad as many feared, banks began releasing some of those reserves in 2021 to boost earnings.
JPMorgan injected $2.9 billion of credit reserves into earnings in the fourth quarter of 2020, and just $1.8 billion in Q4 2021. Reserve releases are also expected to continue at a slower pace.
Write to Jack Denton at [email protected]