JP Morgan Chase (NYSE:JPM) Is A Buy On Post-Earnings Weakness

Another Blowout Quarter For JP Morgan

The entire banking sector began moving higher late in 2020 following the Fed’s stress tests. While some banks were found deficient others, like JP Morgan Chase (NYSE:JPM), were not. The Fed allowed the best-capitalized banks to resume their buybacks and even opened the door for dividend increases. The only thing standing in the way, other than the uncertain economic recovery, was capital reserves.

The banks, including JP Morgan, increased their capital reserves for credit losses by high-triple-digits which cut deeply into profits and free-cash-flow. Now, with the first of the banks reporting their Q4 earrings and cutting back on reserves the outlook for improving profits, increasing buybacks, and dividend increases are more robust than ever.

JP Morgan Blows Past The Consensus

JP Morgan’s Q4 results blew past the consensus but there are some things to consider. The first is that the consensus estimates were far too low and that is no secret. The market has been expecting solidly-better-than-consensus earnings for the last six months and still, the consensus targets were slow to catch up. And they still haven’t. The second is capital reserves. The release of capital reserves helped juice the bottom line results so take the comparisons with a grain of salt.

On the top-line, the company reported $30.16 billion in net consolidated revenue versus the $28.74 billion expected by the analysts. The revenue is up 3.4% from last year and beat the consensus by 500 basis points as both consumer and investment banking continue to show improvements. Investment Banking revenue grew 37% driven by higher fees across all product lines. Fixed Income Market revenue is up 15% on strength in Credit, Currencies, EM and Commodities. Equity Markets net revenue is up 32% with Asset Management and Commercial Banking up 9% and 8%.

Looking at the consumer, Consumer & Community banking revenue is down 1% sequentially and 8% YOY despite a vote of confidence from CEO Jamie Dimon. Mr. Dimon says the consumer continues to recover and that is evidenced by quarterly increases in net debit and CC spending.

"In Consumer & Community Banking, deposits grew 30% or over $200B driven primarily by growth in the Federal Reserve’s balance sheet and the continuation of modest market share gains... Consumer spending continued to recover, as reflected in combined debit and credit card spend being up for the full quarter,” said Mr. Dimon in the Q4 press release.

Moving down to the bottom line, both GAAP and adjusted earnings came in far above the consensus. The GAAP $3.79 beat by $1.17 and includes the release of credit loss provisions. The good news is that when adjusted for those same credit loss provisions the EPS of $3.07 still beat the consensus by over a dime.

The Technical Outlook: JP Morgan Pulls Back After Earnings

Shares of JPM have been in a strong uptrend since December 2020 so it is no surprise to see them pulling back a little after the Q4 release. The move has shares down about 1.5% in premarket trading and could results in a larger pullback before the uptrend continues. The best target for support is at the short-term EMA which is about 8.5% off the recent high, but don’t count on price action falling that far.

With the outlook for earnings as good as it is and a dividend increase on the table this stock is going higher. To put the outlook for dividend increase into perspective, the Q4 EPS is enough to cover the annual payout BY ITSELF. Looking forward, the company should continue to earning steady if not growing EPS from the core business and continue to release capital reserves which bring the prospect of a special dividend onto the table.