JPMorgan, Chase & Co. (NYSE: JPM) has set the bar for corporate performance in the third quarter.
Whereas analysts have been preparing the investment community for results that might be “disappointing” or “underwhelming,” Jamie Dimon, JPMorgan CEO, comes right out and post a third-quarter profit that is up 8 percent for the quarter.
The bank earned $2.68 per share in the third quarter versus $2.34 per share a year earlier as profits rose to $9.08 billion from $8.38 billion in the previous year.
And, most important, the bank’s return on equity rose to 15 percent in the quarter, up from 14 percent one year ago.
Mr. Dimon praised the “broad-based strength” of the bank and the “resilience” of the bank’s business model, in spite of “a more challenging interest rate backdrop.”
Analysts had been arguing that the banking industry might face a squeeze on earnings because of the drop in short-term interest rates (thank you Federal Reserve) and the only way the bigger banks might combat this is through fees, especially on trading or investment banking.
In this respect, JPMorgan posted it “best ever” third quarter for investment banking fees.
The investment banking division experience an 8 percent rise in revenues for the quarter, reaching a record of $1.9 billion.
And, even with the reversal of the movement in short-term interest rates, the bank saw its net interest income rise to $14.4 billion, up 2 percent for the quarter.
Loans in consumer lending fell 4 percent in the third quarter and home mortgage lending dropped 12 percent. However, credit card volume was up by 10 percent.
What should be noted here is that JPMorgan turned in these very good results, despite the fact that the “traditional banking” area of the organization did not do that well.
David Benoit writes in the Wall Street Journal that “The bank has now posted year-over-year profit gains for each of the past seven quarters, boosted by rising interest rates that had increased the profitability on lending operations.”
This was good news to me, because it meant that the basic business of banking was, once again, providing the foundation for the increasing profitability.
Earlier in the economic recovery, a lot of the improvement in bank earnings came from trading, asset management, and from fees, not associated with the lending function of banks. The earnings improvements were welcome, but they were quite volatile and did not provide the banks with a stable, consistent source of profits.
Each quarter’s results were a mystery because one just didn’t know what was going to step up in any particular quarter to provide a bank with its ‘improved” earnings.
I have praised Morgan Stanley (NYSE: MS) and its new leader during the current economic recovery period because of the changes it made to business model to let it rely less upon highly volatile sources of revenue and to build the bank to provide steadier flows on income over time.
Now, it looks as if the situation is changing. With the Federal Reserve cutting its policy rate of interest, the net interest margins of commercial banks will decline and banking organizations will have to rely on more volatile sources of income to support their return on equity.
It seemed as if this tone was reflected in the comments of Mr. Dimon, who introduced the bank’s results, by saying that one needed to be more cautious about the future because of declining short-term interest rates, slowing economic growth, and other uncertainties present in the current environment.
Still, JPMorgan, Chase has set the bar high for the quarter, and especially shines because of the 15 percent return on equity it posted for the quarter.
JPMorgan, Chase has been leading the larger banks through this period of economic expansion and seems to be in a good position to weather some less favorable times.
Jamie Dimon, in my opinion, remains the best CEO in the banking industry and JPMorgan, Chase continues to set the standard for bank performance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.