JPMorgan's earnings report is expected to beat market expectations

On July 14, 2023, JPM (JPMorgan Chase) will release earnings information In the current market, JPMorgan Chase's stock price performance lags behind the market. Therefore, it is necessary to analyze from the specific business dimension whether it is a "market pricing error" or "JPM's business is indeed insufficient", which will determine the later trading strategy.

1. Business introduction

First of all, for the split of JPM's business, JPMorgan Chase has 4 business departments and 1 corporate department. The business segment is for Consumer Business and Retail Business, Consumer Business is the Consumer and Community Banking (“CCB”) segment, Retail Business includes Corporate & Investment Banking (“CIB”), Commercial Banking (“CB”) and Asset & Community Banking (“CB”) Wealth Management (“AWM”).

1. Consumer and Community Banking CCB: Provides products and services to consumers and small businesses through bank branches, ATMs, digital (including mobile and online) and telephone banking. Specific businesses include banking and wealth management (deposits, investment and loan products, cash management, payments and services), housing loans, credit card services, and auto loan and leasing services, which are highly relevant to the overall US economic recovery and risk-free interest rate levels.

2. Corporate and Investment Banking Department CIB: mainly provides banking business and market and securities business. Among them, the banking business is operating financing consulting, payment business and cross-border financing business; market and securities services include risk management solutions and asset custody, and this business is related to the performance of the US stock capital market.

3. Commercial Banking Department CB: Provides loans, payments, investment banking and other services for three major customer groups, including middle market banks (small and medium enterprises, local governments, non-profit organizations), large corporate customers and commercial real estate banking. The business is related to the performance of the risk-free interest rate level.

4. Asset and Wealth Management Department AWM: Provides asset management and private banking services, which are related to the overall economic recovery of the United States.

Therefore, our research focuses on the level of risk-free interest rates and the performance of the capital market business, and the effect of the acquisition of First Republic will also have.

2. Risk-free interest rate level

During a rate hike cycle, banks' net interest margins typically increase.

The net interest margin refers to the difference between the income obtained by the bank on the liability side and the asset side. When the central bank raises interest rates, the cost of liabilities (i.e. interest rates paid to depositors) of banks will rise slowly, while their asset returns (i.e. interest earned from lending) will rapidly increase, which will widen the bank's net interest margin

The net interest income in 2022 will be 66.71 billion yuan, a year-on-year increase of 27.53%, and the net interest income in the first quarter of 2023 will be 20.7 billion yuan, a year-on-year increase of 49.3%. The rapid growth of net interest income is mainly driven by rising interest rates and loan growth. With the 10-year treasury bond yield exceeding 4%, it is expected that interest income will still have a good increase compared with the first quarter of 2023. At the same time, the 10-year treasury bond yield in 2022Q2 is around 3%, which is significantly lower than the risk-free interest rate level in 2023Q2.

We can preliminarily judge that JPMorgan Chase's overall net interest spread in the second quarter of 2023 will continue to expand.

3. Capital market performance

When the capital market performs well, the company's stock price and demand for bond issuance usually rise, which will increase the income of the investment banking business, and vice versa, will restrain the performance of the investment banking business.

In 2022, the net income of investment banking business will be US$47.9 billion, a year-on-year decrease of 7%, and the net profit will be US$15 billion, a year-on-year decrease of 29%. In 2022, the net income of the market and securities business will be 32.6 billion yuan, accounting for 68% of the investment banking business. Therefore, the performance of the investment banking business is mainly driven by the market and securities business. This part of the business is highly linked to the performance of the macro capital market.

We can preliminarily judge that JPMorgan Chase's investment banking business will perform relatively well in the second quarter of 2023.

4. Impact of JPMorgan Chase's acquisition of First Republic Bank

On May 1, the U.S. Federal Deposit Insurance Corporation (FDIC) took over First Republic Bank. On the same day, FDIC accepted JPM's acquisition offer for First Republic Bank and took over most of First Republic Bank's assets.

The executives of JPMorgan Chase estimated that the acquisition is expected to bring JPMorgan Chase more than 500 million US dollars in net profit per year, and the IRR will exceed 20%. downside risk. In addition, First Republic Bank has 83 business outlets (approximately 50% overlap with JPMorgan Chase), and wealth management assets of about 300 billion U.S. dollars. JPMorgan Chase will also strengthen its own wealth management network. From the perspective of outlet map distribution , the transaction will most likely enhance the synergy between JPMorgan Chase and First Republic Bank. This part of the business is highly linked to the performance of the macro capital market, but it is clear that the U.S. stock market performed well in 2023Q2.

And since the collapse of Silicon Valley Bank in March this year, new customers of JPMorgan Chase have flocked to it. As of April this year, JPMorgan Chase had a net increase of 600,000 new checking accounts. JPMorgan Chase Private Bank opened 40,000 new accounts in the past 10 weeks, said Mary Erdoes, head of wealth management at JPM.

In addition, the bankruptcy of the First Republic Bank is more due to the liquidity crisis than the continuous deterioration of the actual business. With the continuous intervention of JPMorgan Chase, it is expected that the business of the First Republic Bank will continue to pick up. In terms of Republic’s stock price performance, it can also be seen that the capital market’s expectations for First Republic Bank are increasing.

On the whole, at present, JPMorgan Chase’s commercial banking business, investment banking business, and the asset business of the acquired First Republic Bank will have a good overall recovery. At present, Bloomberg’s JPM consensus forecast is that the EPS of 2023Q2 will be about 3.77 US dollars, but 2023Q1 From the current situation, it is expected that the EPS of 2023Q2 will be better than that of 2023Q1, at least not too low. Therefore, the current market expectations are low. It is expected that after the financial report is disclosed, JPM’s performance will be relatively strong, so here will be Birth of a transactional strategy:

(1) Sell the PUT (put option) after the financial report period, with the decrease of time value, and the performance of the financial report exceeding expectations, to obtain excess returns;

(2) Before the financial report is disclosed, if the stock price fluctuates upwards, buy a call (call option) with less out-of-the-money at the beginning of the transition period. After the stock price rises, the option value changes from out-of-the-money to real-the-money options, and after the volatility increases , the overall elasticity will be enhanced;