JP Morgan banks on investment banking

The company will announce its first-quarter figures on Tuesday 14 April, and core investment banking services are key to its success. 

Canary Wharf
Source: Bloomberg

JP Morgan’s core business is going strong but legal expenses, lower trading revenue and tighter capital requirements are still an issue for the major bank. Stripping out the legal costs that were in excess of $1 billion last year, the firm posted record net income, and it is particularly impressive when you take into account disappointing results from the dealing division.

Like its Wall Street competitors JP Morgan is getting back to basics and leveraging its balances sheet, and that means reducing its exposure to the financial markets. Tougher regulations from the authorities and reduced market volatility equated to a 23% drop in bond trading earnings. The days of banks depending on their trading desks to bolster their profits are over.

Underwriting fees from the debt market reached a record level at JP Morgan, and this cushioned the blow of a double-digit drop in equity underwriting fees. Facilitating capital raising on behalf of clients led to less risk for the bank, and the equity underwriting side of the business will pick up when US interest rates start to rise. Advisory fees were flat on the year, which may not be exciting, but steady income is required to beef up its cash position, and enhance investor confidence.

The CEO Jamie Dimon is only too aware of the damage to the bank's reputation in the wake of the LIBOR rigging scandal, and is keen to prevent any future occurrence. The costs associated with misconduct prevent the bank from having a record year in terms of earnings per share (EPS), and not to mention to increased costs of compliance and internal regulation. 

JP Morgan’s capital structure is solid, but new capital requirements that are to be introduced by the Federal Reserve later this year will require the bank to free up additional capital. While it shouldn’t be a problem for the titan of Wall Street, it will curtail profitability.

The consensus is revenue of $24.5 billion and EPS of $1.41 when JP Morgan reveals its first-quarter numbers. The bank’s fourth-quarter update was not well received by the market. Revenue was $23.55 billion and EPS came in at $1.33, while the market was expecting $24.08 billion and $1.31 respectively. The company will announce its full-year numbers in January 2016, and the market is expecting revenue of $99.33 billion and EPS of $5.81. These forecasts represent a 1.4% increase in revenue and a fractional dip in EPS.

Equity analysts are very bullish on JP Morgan. Out of the 40 recommendations, 31 are buys, and nine are holds. The average target price is $68.70, which is 12% above the current price. Investment banks are moderately bullish on Goldman Sachs, and out of the 32 ratings, ten are buys, 19 are holds, and three are sells. The average target price is $198.87, which is 2.6% above the current price.

The number of short position taken out on JP Morgan is now at its highest level for 2015, and the amount of shorting has increased by nearly 6% since the fourth-quarter numbers were reported in January.

The stock has been in an uptrend since the end of January, and the 100-day moving average (MA) is providing support at $60. If this mark is held the resistance at $62.35 will be the initial target, and then lasts year’s high of $63.50 will be the next. A drop below $60 will bring the 200-day MA into play at $59.30, and if that mark is breeched the next support level will be $58.

JP Morgan is available for extended hours trading

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