JPMorgan’s Silver Lining Still Comes With a Cloud

(Bloomberg Opinion) — JPMorgan Chase & Co.’s net interest income was the hot topic of its third-quarter results, much to the irritation of Chief Executive Officer Jamie Dimon, who grew impatient with quibbling over details of the bank’s outlook on its earnings call on Friday. 

Net interest income matters because it makes up half of JPMorgan’s total revenue, and it was a point of debate after Chief Operating Officer Daniel Pinto issued a warning just last month that analysts’ 2025 forecasts for this revenue were running too hot because the Federal Reserve was preparing to cut interest rates. But then the bank beat expectations for NII in a strong quarter overall and raised its guidance for this year. 

Confused? Analysts and investors were, hence all the questions and the volatility in the premarket trading of JPMorgan shares, which jumped more than 3% then slipped below Thursday’s close before rising nearly 4% when trading opened.

However, the bigger picture for JPMorgan was good revenue and profits across its businesses in the quarter but still a somewhat reserved outlook longer term.

Investment banking revenue was bolstered by opportunistic bond issuance among clients and by the closing of some mergers and acquisitions earlier than expected in the third quarter instead of the fourth. Along with JPMorgan’s forecast-beating results in bond and equity trading, this bodes well for rival banks scheduled to report their numbers next week. But it doesn’t suggest that dealmaking or investor activity will necessarily see a big pickup for the full year. Much will depend on the outcome of the US presidential election in November because of its effect on sentiment and regulation.

On the contentious net interest income question, the jump in the quarter and higher guidance for the year was also a bit of a head fake. The bank gave a mix of reasons: Slightly higher borrowing held on credit cards and more deposits from corporate and financial clients helped, while JPMorgan also invested some spare cash into bonds rather than leaving it at the Fed.

Moving money into Treasuries and mortgage bonds is a defensive move for JPMorgan’s revenue as the Fed starts cutting rates, but maybe not for long. Chief Financial Officer Jeremy Barnum emphasized the negative slope of the yield curve, which means rates on short-term bonds are higher than longer-term ones. In other words, the securities worth buying are likely to have terms of a year or less.

In spite of the confusion, Pinto’s comments in September do fit with this picture. His warning was that forecasts for 2025 did not show enough of a drop in NII compared with 2024 given expectations for Fed rate cuts. Since then, analysts collectively have cut forecasts for JPMorgan’s NII by about $3 billion, which Barnum said put them in the right ballpark. Next year’s NII excluding markets will likely be more than $4.5 billion below this year’s.

But what irked Dimon was analysts’ desire for an ultimately spurious accuracy in getting their models to line up with JPMorgan’s less specific longer-term guidance. “Next time we should just give them the damn number,” he said in exasperation. He made the fair point that market expectations for Fed rates will move over the quarters ahead and that economic conditions will also change in hard-to-predict ways, so analysts’ forecasts and the bank’s guidance will have to evolve, too.

But on the other hand, the bank does guide and analysts do issue forecasts, and it’s all to help investors make choices about whether to buy or sell the shares. This is part of what earnings season is about.

The bigger picture is that JPMorgan continues to over-earn from high interest margins on its vast deposit base and on low credit losses among American consumers. America’s biggest bank does this more than most others because its size and reputation for safety attracts more deposits more cheaply than peers. The bank’s over-earning will ease, but not a lot. NII will fall in coming quarters but bottom out around the middle of next year as falling rates first cut revenue but then encourage greater borrowing.

Losses on bad credit, meanwhile, aren’t expected to worsen much from here, especially among consumers, Barnum said. US consumers are fine and on a strong footing, he added. There has been a shift in spending patterns from holidays and restaurants to more everyday expenses, but this doesn’t send the typical signal that consumers are battening down the hatches. In Barnum’s view, the switch is more of a return to normal after the elevated post-pandemic spending on experiences instead of goods.

Bottom line: These results were positive news for banking and the US economy, which is why the KBW Bank Index also rose more than 3% Friday morning. But international tensions, the coming election and high-flying asset prices are all potential banana skins. A lot could go wrong. And with JPMorgan’s shares trading at nearly double their net-asset value, don’t expect the bank to spend any of its roughly $30 billion of spare capital on a big wave of stock buybacks. Like many other assets, JPMorgan’s shares are very expensive.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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