JP Morgan posts an earnings beat, but forecast on interest income disappoints

KEY POINTS

• The bank posts a record second-quarter profit of $9.65 billion, 16% higher than a year earlier, or $2.82 a share, beating the $2.50 estimate of analysts surveyed by Refinitiv.
• Revenue of $29.57 billion, a 4% increase from a year earlier, also edges out expectations of $28.9 billion.
• However, JPM cuts its forecast for 2019 net interest income — a main driver of bank profits — by $500 million to $57.5 billion, compared with the $58 billion target in the previous quarter's presentation.

J.P. Morgan Chase on Tuesday reported earnings that exceeded analysts' expectations, aided by an income tax benefit that boosted results by $768 million.

The bank posted a record second-quarter profit of $9.65 billion, 16% higher than a year earlier, or $2.82 a share, beating the $2.50 estimate of analysts surveyed by Refinitiv. Revenue of $29.57 billion was 4% higher than a year earlier and edged out expectations of $28.9 billion.

J.P. Morgan said that the presumably one-time tax boost came from the resolution of "certain tax audits" that lifted the company's per share earnings by 23 cents.

The bank cut its forecast for 2019 net interest income — a main driver of bank profits — by $500 million to $57.5 billion, compared with the $58 billion target in the previous quarter's presentation. Shares of J.P. Morgan climbed 0.5% at 10:30 a.m. after falling by as much as 1.8% in premarket trading.

"With these money-center banks, the yield curve does matter," said Marty Mosby of Vining Sparks, who confirmed on CNBC's "Squawk Box" that net interest income forecast was pressuring J.P. Morgan's stock early Tuesday.

The Federal Reserve signaled that it is preparing to cut its benchmark interest rate later this month, a move that could compress margins on banks' core lending businesses. Analysts will be keen to ask J.P. Morgan executives how that will impact results in 2019 and beyond. The bank posted record profits in the first and second quarters of this year, helped by higher interest rates -- the last hike was in December -- that boosted results in the firm's retail banking operations.

J.P. Morgan is assuming that the Fed will cut rates as many as three times this year, CFO Jennifer Piepszak told reporters on a media call. (Three months ago, they had assumed zero cuts, she said.) If there is just one cut, net interest income could be higher than $57.5 billion, and lower if there are more cuts, she said.

"The range of outcomes are incredibly broad in terms of the number of rate cuts, and if those rate cuts end up being insurance cuts that ultimately sustain the expansion or whether they end up being in response to real economic slowdown," Piepszak said.

The bank's fixed income trading division produced $3.69 billion in revenue, a 7% increase that exceeded the $3.36 billion estimate. Meanwhile, its equities trading business generated $1.73 billion in revenue, a 12% drop that missed analysts' $1.84 billion estimate.

The biggest U.S. bank by assets is closely watched by investors looking for signs of how the industry's Main Street and Wall Street businesses did in the period. Bank stocks have rebounded in recent months as strong results from lenders' retail businesses helped drive firms including J.P. Morgan to record profits, offsetting declining revenues from trading and other Wall Street activities.

In May, J.P. Morgan announced it was acquiring medical payments firm InstaMed for more than $500 million, its biggest takeover since the financial crisis, to push more deeply into the health-care spending market.

The bank also rolled out a digital robo adviser in a bid to persuade banking customers to make investments with the firm.

Last month, J.P. Morgan got approval from regulators to boost its dividend to 90 cents a share from 80 cents and announced a $29.4 billion share repurchasing program.

Earlier this week, Citigroup posted second-quarter profit that exceeded analysts' expectations on a $350 million boost in revenue from the IPO of bond trading platform Tradeweb.

Here's what Wall Street expected for J.P. Morgan:

• Earnings: $2.50 per share, a 9.1% increase from a year earlier, according to Refinitiv.
• Revenue: $28.9 billion, a 1.8% increase from a year earlier.
• Net interest margin: 2.51%, according to FactSet.
• Trading revenue: fixed income $3.36 billion; equities $1.84 billion.