JPMorgan May Have Set Its Earnings Bar Too High
Citigroup analyst Keith Horowitz noticed a slowdown in the fixed income and currency markets, and reduced his fourth-quarter earnings estimate by 15 cents. Similarly, Bank of America/Merrill Lynch analyst Guy Moszkowski trimmed his fourth-quarter earnings estimate by 3 cents, to 68 cents a share, when he noticed a deceleration in trading that started in November and continued through the quarter's end.
Citi's Horowitz believes JP Morgan's investment banking results could keep declining in the coming months. He says the bank's "competitive advantage" after the financial crisis was its strong balance sheet. But Horowitz says that advantage has disappeared as the markets have normalized and that the bank is "exposed to losing market share."
A Bellwether for Consumer Spending
That's certainly not good news for JP Morgan, which has relied on the stellar performance of its investment banking division to make up for losses in its credit cards and home mortgage units. Its third-quarter profit of $3.6 billion was a seven-fold increase from the same period last year, thanks mostly to that investment banking operation, which underwrote a lot of debt and equity issued by corporations wanting to raise cash.
After buying Washington Mutual last year, JP Morgan has emerged as a powerhouse in home mortgages, retail banking and credit cards, along with its investment banking franchise. Because of that, it's become a bellwether on consumer spending, and economists watch the bank's numbers closely to see whether defaults in its mortgage and credit card businesses are slowing, which could be a sign that consumers are starting to stabilize.
But if the bank was hoping for a boost from retail banking, there wasn't much good news there, either, and its mortgage business probably wasn't helped by seesawing mortgage rates. The Mortgage Bankers' Association has reported that mortgage originations likely saw a 21% decline as rates rose during the quarter, leading to a decline in refinancing activity.