Strong Credit Demand Boosts JPMorgan's 2Q Results
Although the bank is still suffering the effects of low interest rates, a boost in credit demand and signs that rates are heading higher bode well for the firm.
JPMorgan Chase is still suffering the effects of low interest rates. Its reported yield on interest-earning assets was only 2.44%, making it difficult to achieve a reasonable level of net interest margin. However, the outlook is slowly brightening on this front. The Federal Reserve has expressed an intention to begin raising rates in the near term. More important, JPMorgan Chase's own results reflected an increase in credit demand, with core loans growing 12% during the past 12 months. Consumer lending was a particular strong point, up 10% since the second quarter of 2014. We believe the housing market is beginning a strong recovery, driven by aging millennials, falling unemployment, and loosening credit. This should bode well for consumer banking over the near term and for rates over a longer time frame. We model a 55-basis-point increase in net interest margin over the next five years.
There will be some offsetting factors as growth resumes, however. Credit losses are low after so many years of conservative underwriting. For example, the company benefited from charge-offs totaling only 2.6% of loans in its credit card business in the second quarter and recorded near-perfect credit quality in its commercial bank. Asset management results have also been helped by a rising market. Furthermore, we expect that litigation will be a fact of life for money center banks for the foreseeable future, as none have demonstrated the ability to keep their noses completely clean for any length of time. Finally, we believe the transformation of the branch banking model in an increasingly online world will actually limit cost-cutting ability in the medium term as firms adjust.
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