How JPMorgan plans to keep the momentum going

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JPMorgan’s record profits raised two immediate questions: Can it outdo itself in 2020, and should other banks be upbeat about their own revenue prospects in coming quarters?

Yes, and it depends, seem to be the answers.

Higher revenues swept in from its trading and investment banking business boosted JPMorgan to full-year net income of $36.4 billion, which was 12% greater than a year earlier, and led to a 21% year-over-year bump in quarterly profit to $8.5 billion. Though such lines are inherently volatile, big banks like JPMorgan enjoy an edge in capital markets where “scale means more than ever,” said Jeffery Harte, managing director at Piper Sandler.

“It’s a bit hard to bet against [JPMorgan] in an environment when capital market revenue is becoming more important than net interest revenue,” Harte said.

Smaller banks are struggling to replace income lost with lower interest rates by emphasizing investment and other fee-based services. Not only do big banks have the size and diversification that make it easier to find fallback plans domestically, but the brightening outlook on trade tensions with China are good news for a global banking player like JPMorgan.

CEO Jamie Dimon said the bank will focus on expanding the corporate and investment banking operation as well as an asset management business in China.

Its application for a majority-owned securities company in China was approved there in December, making it the first U.S. bank to gain such a foothold in a country that has long shut out foreign banks from having control of companies in its financial system.

“This allows us to do in China what we do everywhere else in the world,” Dimon said. “We want to be there for 100 years.”

Executives were optimistic that a pause to the trade spat between the Trump administration and China could give more businesses the certainty they need to borrow again and make new investments. The signing of an initial agreement between the two sides this week could give more runway to JPMorgan’s plans there.

“Things stopped getting worse,” JPMorgan CFO Jennifer Piepszak said on the call with analysts about the trade environment.

Piepszak also pointed to the bank’s aggressive expansion in U.S. cities like Boston, Washington and Philadelphia, as well as a chance to take market share in the credit card business.

“We continue to see opportunities across the franchise,” Piepszak said.

The bank did not go blemish-free in the fourth quarter as it, too, was hit by lower interest rates that have been putting a dent in profits across the industry during the latter half of 2019.

Net revenue for JPMorgan’s corporate banking unit declined $355 million year over year to a loss of $228 million for the quarter due in part to lower interest income and some markdowns on past private-equity investments.

Net income in commercial banking declined by 9% over the previous year to $938 million for the fourth quarter due to tighter margins.

Piepszak warned on the call that expenses were expected to increase to $17 billion in the first quarter of 2020 from $16.3 billion at the end of the year, due to increases in technology investment and further hiring.

There are regulatory challenges in store for 2020, also.

Banks had to implement the new Current Expected Credit Losses accounting standard on Jan. 1, which can prove to be a drag on earnings. The new standard requires banks to gauge expected losses at closing over the entire life of a loan. JPMorgan said this would add $4.3 billion to its allowance for credit losses mostly in the credit card business.

After reclassifying some loans and taking certain tax benefits, CECL’s total impact on the bank’s capital levels would be $2.7 billion, which will be phased in over the next four years.

While the trading and investment banking business JPMorgan relied on in the fourth quarter tends to elude that kind of recurring performance quarter to quarter, it could “be set up for a pretty good year next year,” Harte said.

“Once you move beyond those biggest players, the smaller you get, the more incrementally difficult to fund the investments you need to keep up,” Harte said. “The bigger you are, the better.”

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Growth strategies Earnings GSIBs Trade agreements Tariffs Net interest margin Jamie Dimon JPMorgan Chase