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Boosted by Investment Banking, JPMorgan Earnings Beat Expectations. But the Stock Is Falling as Trading Slowed.

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JPMorgan stock has been on a tear this year. Will that continue through the rest of 2022?
Johannes Eisele/AFP via Getty Images

JPMorgan Chase ‘s fourth-quarter earnings beat expectations as the biggest U.S. bank benefited from busy capital markets and an increase in lending, though trading activity has slowed down.

The banking powerhouse posted profits of $10.4 billion in the final three months of 2021 on $30.3 billion in revenue. That took earnings per share to $3.33. Wall Street was expecting profits of $9.1 billion, or $3.01 a share, on revenue of $29.8 billion, based on analysts surveyed by FactSet.

“JPMorganChase reported solid results across our businesses benefiting from elevated capital markets activity and a pick up in lending activity as firmwide average loans were up 6%,” Jamie Dimon, the bank’s chair and CEO, said in a statement. 

Revenue in the group’s investment banking division was a standout—up 28% from the fourth quarter of 2020 to $3.2 billion, driven by higher fees. “Unprecedented” mergers and acquisitions (M&A) activity and strong performance of initial public offerings (IPOs) added another boost.

A slowdown in trading activity took some of the shine out of the release. Markets revenue fell 11% to $5.3 billion, down after a record quarter last year amid what the bank said was a challenging trading environment in rates, lower sales in derivatives, and a 2% decline in equity markets.

Shares in JPMorgan (ticker: JPM) fell more than 3% in premarket trading after the financial results were released. The stock was around 1% higher before earnings were posted. While earnings were strong, a lack of blowouts across the board and lower trading revenues could be weighing on the stock after recent outperformance.

A decline for the stock following earnings isn’t unusual: JPMorgan stock has declined on every results day for the past five quarters. These consistent dips have come even as profits revealed on each of those days have topped Wall Street’s expectations for the bank’s performance.

The latest results bring net income for the full-year to $48.3 billion, up from $29.1 billion in 2020, but the quarterly figures mark a decline from the same period in the prior year. JPMorgan’s fourth-quarter 2021 profits were 14% lower than in 2020, when the bank posted earnings of $12.1 billion, or $3.79 per share.

Lower profits in the latest quarter compared with a year ago can, in part, be attributed to a smaller release of loan loss reserves in the recent quarter.

As Covid-19 swept the world in 2020, banks set aside billions in reserves for credit losses that were expected to come with the economic fallout from the pandemic. When the economic reality wasn’t as bad as many feared, banks began to release some of those reserves in 2021, boosting earnings. 

JPMorgan injected $2.9 billion of credit reserves into earnings in Q4 2020, and just $1.8 billion in Q4 2021. Reserve releases are also expected to continue slowing.

However, net interest income was higher in the quarter, and ahead of expectations. This is a fundamental measure of banks’ profitability, marking the difference between interest income and expenses. Wall Street was looking for quarterly net interest income of $13.1 billion; JPMorgan delivered $13.7 billion, up 3% from a year ago.

Shares in major banks have been on a tear amid an environment of tightening monetary policy as well as consensus on a positive outlook for the economy. JPMorgan stock has climbed almost 7% in the last month alone, outpacing a 1.1% rise in the wider S&P 500 index.

“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks,” Dimon said. “We remain optimistic on U.S. economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth.”

The Federal Reserve agrees with Dimon about a strong U.S. economy, and is winding down pandemic-era stimulus and setting out to normalize financial conditions, including raising interest rates. Tighter Fed policy along with higher inflation has lifted bond yields and steepened the yield curve, which refers to a greater difference between short-term and long-term bond yields.

Higher yields or interest rates are good for banks, because it gives them wider margins—and thus, bigger profits—when lending money. Banks charge more for loans than what they receive for their deposits, so margins come under pressure in an ultra-low-rate environment.

Loan growth was also in focus in JPMorgan’s release, with lending rising across the group, even though average loans in consumer and community banking fell 1%. Businesses and households have borrowed less than usual during the past year, as the pandemic left many flush with cash amid government stimulus and reduced spending.

Write to Jack Denton at jack.denton@dowjones.com

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