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JPMorgan Beats Estimates, but Lower Interest Is a Worry

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JPMorgan Chase (JPM) posted stronger-than-expected second-quarter earnings results on Tuesday. The bank’s revenue topped Wall Street’s expectations. Meanwhile, its earnings came in well ahead of analysts’ estimates. The bank’s top line continued to benefit from higher net interest income. Balance sheet expansion combined with growth in deposit margins drove its NII (net interest income). JPMorgan also benefited from higher interest rates, but lower investment banking revenue remained a drag.

The bank’s second-quarter earnings handily exceeded analysts’ expectations thanks to growth in NII, lower provisions, and share repurchases.

Despite the beat, shares of JPMorgan Chase were trading about 1.6% lower in the premarket session, as the Fed’s dovish stance is likely to affect banks’ net interest incomes. While we’re impressed by JPMorgan’s second-quarter financial performance, the high possibility of a rate cut in July makes us skeptical.

We believe an interest rate cut amid heightened competitive activity is likely to restrict the upside in banking stocks. Banks could find it hard to drive net interest income amid margin compression.

JPMorgan’s second quarter in detail

JPMorgan Chase posted second-quarter net revenue of $29.6 billion, implying a YoY rise of about 4%. Analysts expected the bank to post revenue of $28.9 billion in the quarter. JPMorgan’s NII rose 7% to $14.5 billion driven by a higher deposit balance and an increase in deposit margins in its Consumer and Business Banking segment. Moreover, loan growth and margin expansion in the Cards segment supported the company’s NII in the quarter.

Investment banking revenue fell 9%, reflecting a decline in fees across all products. Citigroup, which posted better-than-expected results on Monday, also marked a fall in investment banking revenue. Citigroup’s top line benefited from higher deposits and growth in Citi-branded card revenue. Meanwhile, benefits from Tradeweb, share buybacks, lower taxes, and efficiency savings supported its EPS growth.

JPMorgan posted adjusted EPS of $2.59 in the second quarter, which came in ahead of Wall Street’s estimate of $2.50 and reflected a rise of 13.1% YoY (year-over-year). Share buybacks and lower provisions drove the bank’s bottom line growth. Including a onetime boost from tax, JPMorgan posted EPS of $2.82. Its provision for credit losses decreased 5% to $1.1 billion.

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