Even Jamie Dimon Can’t Bend the Yield Curve
(Bloomberg Opinion) -- Jamie Dimon, CEO of JPMorgan Chase & Co., declared in early June that we were entering a golden age of banking. He may have forgot to check in with the Federal Reserve. Global trade concerns, too, may be making JPMorgan’s glowing results look a little less shiny.
On Friday morning, the largest U.S. bank reported its second-quarter results, and they were better than expected. Even as volatility faded a bit, JPMorgan’s traders were able to capitalize, in what could be a good sign for Wall Street’s earnings season. Revenue from fixed-income markets was up a higher-than-anticipated 12 percent from a year earlier, though it was down from the first quarter. JPMorgan’s equity traders matched their very good first quarter, rising 24 percent, which was again better than expected. Investment banking fees also topped estimates, rising 16 percent. Many analysts thought they would dip.
In all, revenue rose 8 percent, less than the 12 percent growth of the first quarter, with lending up 4 percent from a year ago. JPMorgan’s earnings rose 18 percent, but strip out the boost from the tax plan, and that gain is more like 13 percent. Still, it’s all very good news for Dimon’s bank, which is on track to have $111 billion in revenue this year, and $34 billion in earnings.
Dimon has long touted the benefits of JPMorgan’s large universal bank model. When lending is slow, trading or asset management or investment-banking fees can take up the slack, and visa versa, and you get a good result — which is exactly what happened in the quarter. Dimon says his bank’s diversification makes it safer, and that appeared to be the case in the financial crisis.
But even JPMorgan’s size won’t allow it to bend the flattening yield curve, which these days is really the biggest threat to bank earnings. In fact, its size, especially its large markets business, makes JPMorgan more vulnerable than a traditional consumer bank if the Fed continues to raise short-term interest rates faster than bond traders push up the long end of the curve. Indeed, while JPMorgan’s interest income was up 21 percent in the quarter from a year earlier, its interest expense soared by more than double that amount, 56 percent. And the risk from JPMorgan’s size goes double when it comes to the brewing trade war.
Right now, there are a lot of things working in JPMorgan’s favor. The economy is humming along, with GDP expected to have grown more than 3 percent in the second quarter. Unemployment is back down to 4 percent. There were the tax cuts. And yet, JPMorgan’s revenue in the latest quarter was up 8 percent, and is likely, given the yield curve, to slow from here. Dimon’s golden age of banking may already be starting to lose its luster.
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