Commercial Banking segment
The Commercial Banking segment is likely to continue driving JPMorgan Chase’s (JPM) revenue mainly due to the higher interest rate spread. The segment posted revenue of $2.3 billion in the second quarter, marking an 11% YoY (year-over-year) rise. This robust growth was mainly driven by increased net interest income due to higher deposit margins and improved investment banking revenues from large transactions.
The bank’s net income rose 21% due to lower taxes and rate spreads. Banks (XLF) and other corporates benefited from lower taxes in the first half of 2018. They managed their expenses by investing in technology and improving their efficiency ratios.
JPMorgan Chase’s Commercial Banking segment had a return on equity of 21% in the second quarter compared to 20% in the first quarter and 17% in the same period last year. The credit release due to higher oil prices and the improving macroeconomic environment could provide room for credit expansion to corporates offering lower-quality paper. As a result, there could be credit expansion and a marginal increase in the cost of funding.
JPMorgan Chase and its peers are expected to see slower credit offtake amid faster rate hikes by the Fed and trade war concerns. Lower taxes have allowed organizations to generate higher cash flows. As a result, they’re targeting lower leverage and repurchases to generate better returns on equity.
In the upcoming quarter, the segment could see subdued credit offtake and higher rate spreads, which would provide marginal gains in its net interest income on a sequential basis.
Citigroup (C) and Bank of America (BAC) had 2%–7% credit growth in the second quarter. Wells Fargo (WFC) has been struggling with compliance and fraud-related issues. Wells Fargo’s credit offtake has fallen ~1% YoY.