The Federal Reserve has raised its federal funds borrowing rate for the first time in seven years and incremental effects on the U.S. market are beginning to show. Since Dec. 16, JPMorgan (JPM, Financial), the Dow’s leading banking stock, has outpaced the broader index down just 0.11%, versus a loss of 0.56% for the Dow Jones Industrial Average.
For the year, JPMorgan was up 5.55% versus a loss of 3.48% for the Dow Jones Industrial Average, and the Dow’s leading banking stock appears to be a key investment to watch as investors gauge the overall effects of the Federal Reserve’s federal funds rate increase on the market as a whole.
As a direct result of the federal funds rate increase, many large banks are increasing their prime lending rate, with JPMorgan, Wells Fargo (WFC) and Bank of America (BAC) all adding 25 basis points. Mortgage lending rates have also been on the rise evidenced by Freddie Mac’s Primary Mortgage Market Survey, which showed the 30-year fixed-rate mortgage average increasing to 4.01% during the Dec. 31 week.
As investors watch the banking sector and JPMorgan in particular, here’s what to expect from the banking conglomerate in its next earnings announcement on Jan. 14.
In the third quarter, JPMorgan saw total net income increase 22% from the year-ago quarter. Consumer and Community Banking led earnings growth for the bank as consumer confidence gained and investors capitalized on the final months of lower interest rates. The Consumer and Community Banking segment improved net income 4% from the comparable quarter to $2.6 billion. JPMorgan’s three core remaining sectors dragged on total earnings as trading in the capital markets remained volatile and commercial banks slowed their borrowing activity. Corporate and Investment Banking earnings were down 13%, while Commercial Banking earnings were down 23%. Asset Management net income was also lower by 19%.
For the fourth quarter, management expects core loan growth to be a key strength for the firm with variable rate loans also adding to loan revenue. For the fourth quarter, the firm expects a gain of 15% from the comparable quarter in core loans. Analysts are calling for a firmwide revenue increase of 3% from the comparable quarter with revenue slightly down from 2014 for a loss of 1% for the year. Earnings for JPMorgan are expected to grow robustly by as much as 19% from the year-ago quarter and 15% from 2014.
Disclosure: I do not hold any shares of JPMorgan.
