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What Are JPM’s Commercial Banking Drivers?

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Rates and offtake

JPMorgan Chase’s (JPM) commercial banking is expected to see improved margins in 2Q17 on higher rates, deposit growth, and marginally higher loan offtake. On a sequential basis, it might see subdued growth as credit offtake has slowed in the recent months. The Fed has raised rates for the second time in 2017, and it is expected to hike rates once more in 4Q17 amid improving employment and macroeconomic factors. The rising rates will provide an immediate margin boost to commercial banks and insurance companies (XLF). However, rate hikes beyond 2017 will depend on how global central banks react to the Fed’s contractionary monetary policy.

In 1Q17, JPM’s commercial banking business managed $2.0 billion in revenues and $799 million in net profits, a strong growth of 12% and 61%, respectively, on a YoY (year-over-year) basis. The growth came on the back of higher net interest income and investment banking fees.

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Rising margins and lower spending

JPM’s major peers like Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) are working on expense management alongside global penetration to improve operating margins. The trend is expected to continue for the next few quarters with a tap on administrative spending, partially offset by higher spending on employees and compensation. In 1Q17, JPM’s commercial banking division saw a rise of 16% in expenses to $825 million on additional staff and investments in technology. The rebound in oil prices (USO) has helped select banks in seeing a reversal of provisions. However, the prices have started falling again, which could push commercial banks’ revenues higher in 2Q17.

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