Markets are irrational with companies in the financial sector. JPMorgan Chase (NYSE: JPM) kicked of quarterly earnings with an impressive earnings and revenue beat on Apr. 13. With higher interest rates and favorable LIBOR spreads, investors should not ignore the sector.
JPMorgan reported earnings of $2.37 a share on revenue of $28.52 billion. While the beat is solid, the bank did not issue a forecast that impressed the market, leading to JPM stock dropping 2.7% after its earnings report.
Still, the revenue beat and 10% Y/Y growth in its Q1 suggests the business will do even better next quarter.
JPMorgan took credit costs of $1.2 billion and consumer charge offs that were in-line with its expectations. Higher rates ahead will pressure customers but not enough for JPM to outperform its own forecasts. Further, JPMorgan’s Commercial Banking unit will give the company’s results a lift.
In Q1, net income of $1 billion and an ROE of 20% were due to the benefit of higher rates. With higher rates ahead, expect ROE moving up. The expenses of $844 million in the period, up Y/Y, are investments in the business that will pay off.
Conservative Outlook
JPMorgan’s conservative outlook puts a lid on the stock’s bounce. Investors who are confident that consumer activity will grow will get rewarded holding JPM and other bank stocks like Bank of America (NYSE: BAC) or Citi (NYSE: C). JPM said:
"As you know, we could have taken a little bit more of a conservative view but where we are right now in the normalization cycle specifically, sort of retail, checking, and savings, as you know we haven't yet seen that unfold.
"We have seen migration in Asset, Wealth Management balances and that to be expected to be a leading indicator. So, this will unfold over the course of the next year or so."
In short, only Wells Fargo (NYSE: WFC) is the stock to avoid, due to its scandal still haunting the company.
