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Banking giant JPMorgan (NYSE: JPM) kicked off the Q1 earnings season by reporting its quarterly results today. In Q1 of 2022, JPMorgan reported earnings of $2.63 per share which was below consensus estimates of $2.69 per share. In the year-ago period, its adjusted earnings stood at $4.5 per share.
Comparatively, its revenue stood at $31.59 billion, compared to estimates of $30.86 billion. In the year-ago period, JPMorgan reported revenue of $30.52 billion. We can see that the banking heavyweight beat consensus revenue estimates but failed to surpass earnings forecasts in Q1 of 2022. At the time of writing, JPM stock is down 1.5% in pre-market trading.
What impacted JP Morgan in Q1 of 2022?
JPMorgan is the largest U.S. bank in terms of assets and was the first among the megabanks to disclose Q1 results. The report released earlier today showcased a less than impressive quarter for JPMorgan on the back of a shaky start to the year. Investors remain worried about a slew of macro-economic factors that are weighing heavily on companies including geopolitical tensions and supply chain disruptions.
In Q1 of 2022, JPMorgan reported a net income of $8.3 billion, representing a year-over-year decline of 42%. Its investment banking division also underperformed in the March quarter as its sales stood at $2.1 billion, compared to estimates of $2.25 billion. The revenue miss in this segment is attributed to the ongoing war between Russia and Ukraine resulting in muted deal activity in Europe.
Further, investment banking fees plunged by 31% year over year as a result of lower debt underwriting and equity activity.
Company CEO, Jamie Dimon stated, “We remain optimistic on the economy, at least for the short term but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”
Will higher interest rates benefit JPMorgan?
There are a few metrics that investors follow closely to analyze the performance of banking companies. One such metric is the net interest income which is the difference between what a bank earns on loans and the interest paid to depositors.
Rising inflation numbers might lead to multiple interest rate hikes this year, which is viewed as a positive development for banking companies. However, if interest rates are hiked too aggressively, economic activity might take a hit and result in a recessionary environment, which in turn will impact JPMorgan’s lending business. In Q1, JPMorgan reported a net interest income rose 7% to $14 billion.
In 2021, JPMorgan and several other banks saw a surge in profit margins due to the release of COVID-19 related allowances for credit losses which were accumulated at the start of the pandemic to offset delinquency rates. But now the boost in the bottom line associated with these reserves should wind down in the upcoming quarters.
In fact, Wall Street expected $900 million in Q1 reserve releases compared to $1.8 billion in Q4 of 2021. Further, analysts also expect JPMorgan’s earnings to decline by 28% year over year to $11.07 per share in 2022.
What next for JPM stock investors?
In the Q4 earnings call, JPM CEO Jeremy Barnum warned investors of higher operating expenditures that were up 11% year over year at $17.9 billion. This figure is forecast to rise to $19.5 billion in Q1 of 2022.
Barnum then emphasized, “It is true that labor markets are tight, that there’s a little bit of labor inflation, and it’s important for us to attract and retain the best talent and pay competitively according to performance.”
JPM stock has returned close to 300% to investors in the last 10 years but continues to trade at an attractive price to earnings multiple of 12x. Analysts tracking JPM stock expect it to gain another 20% in the next 12-months, after adjusting for its dividend yield of 3%.