JPMorgan Chase Third-Quarter Earnings Preview: 4 Things to Watch

By John

As one of the most consistent performers in the bank industry, JPMorgan Chase's quarterly updates aren't as unpredictable as, say, Bank of America's or Citigroup's, both of which are still in the midst of multi-year turnarounds. But shareholders of the nation's biggest bank by assets should nevertheless keep tabs on their investment. With this in mind, here are four things that current and prospective investors in JPMorgan Chase will want to watch for when the megabank reports earnings on October 13.

1. Net revenueRevenue is hard to come by for banks these days. With the benchmark Federal Funds rate hovering just above 0%, JPMorgan Chase and other banks are earning less from their asset portfolios than they have in decades. It's thereby incumbent on banks to offset this with higher noninterest income from investment banking, asset management, and trading, among other activities.

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The good news for JPMorgan Chase in particular is that it generates more than half of its net revenue from noninterest income. The biggest contributors to this are its asset management, trading, and investment banking businesses, which accounted for $7.8 billion, $6.5 billion, and $3.6 billion in revenue for the first six months of the year, respectively.

Investors will accordingly want to watch not only JPMorgan's top-line revenue figure, but also the performance of each of these components relative to the same period last year, as well as the second quarter of this year.

Source: JPMorgan Chase's 2Q15 financial supplement.

2. Loan loss provisionsOne of the last things bank investors need to worry about right now is credit quality. The industry in general has gained a renewed appreciation for risk management, as many banks continue to lick their wounds from the financial crisis. As JPMorgan Chase Chairman and CEO Jamie Dimon explained at the Barclays Global Financial Services conference last month:

There is nevertheless one particular area that investors will want to take note of: loans to the energy sector. Dramatically lower energy prices could spell trouble for these oil and gas companies that don't have the resources to stay afloat until prices recover. In JPMorgan's case, Dimon estimates that it would have to add only $500 million to loan loss reserves even if oil fell to $30 a barrel and stayed there for an "extended period of time."

3. Noninterest expensesThe corollary to the industry's revenue problems is the need for banks to trim expenses. But while this has been an obsession over the last few years at the likes of Bank of America and Citigroup, it isn't typically an issue for JPMorgan Chase, which is known for operating efficiently. Despite this, investors will want to keep an eye on the direction of noninterest (i.e., operating) expenses and JPMorgan's efficiency ratio, which expresses operating expenses as a percent of net revenue. In both cases, lower is better.

Source: JPMorgan Chase's 2Q15 financial supplement.

4. ProfitabilityLast but not least is profitability, or return on assets and equity. These two figures are the single most important variables that dictate a bank's valuation. The more a bank earns relative to its shareholders equity, the higher its valuation, and vice versa. When it comes to banks, in turn, the objective is to generate net income equal to at least 1% of assets and 10% of equity, on an annualized basis.

Source: JPMorgan Chase's 2Q15 financial supplement.

As you can see in the table above, neither of these benchmarks were a problem for JPMorgan Chase in the second quarter, through which it generated a 14% return on tangible common equity and a 1.01% return on assets. And while there's little reason to think that the $2.5 trillion bank's profitability will fall precipitously in the third quarter, it's still good for shareholders to keep themselves abreast of these important measures.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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