Revenue growth without loan growth is possible — if you are JPMorgan Chase & Co.
For other banks, the question remains: Can they figure out how to drive the topline higher without collecting more interest from borrowers?
Higher fees from mortgages, credit cards, corporate banking and trading dominated second-quarter results at the country's second-biggest bank by assets. Fee income rose enough to offset the decline in net interest income, which fell because of shrinking consumer loan balances.
JPMorgan Chase's net interest margin did contract sharply as the price of revenue without loan growth. But the bank can afford to let the margin contract as it gets by on fees, experts say. Few other banks are nearly as big or diverse to do the same. For them, such "transactional income" is not as sustainable a revenue source as income from a growing pool of loans, says Keith B. Davis, a principal and research analyst at Farr Miller & Washington LLC. Smaller institutions lack the fee engines of JPMorgan Chase, which is involved in just about every facet of banking.
"The traditional banks that can't rely on the capital markets business are going to continue to struggle when your loans aren't growing," he said, adding that he was "pretty surprised by the level of fee income" JPMorgan Chase collected in the quarter, particularly in credit cards.
Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said that there may be a lesson for other banks in JPMorgan Chase's results nonetheless. A day earlier, he said, market watchers were expecting JPMorgan Chase's revenue to fall short. Instead, it rose 6% from the previous quarter, to $26.8 billion, yielding a higher-than-expected $5.4 billion profit.
"Revenue issues are addressable," Townsend said. "You can get them to grow through a variety of means … even in a very difficult environment."
The net interest margin contracted a bigger-than-expected 17 basis points from the first quarter, to 2.64%.
Deposits are growing at a strong clip, but with few lending opportunities, the bank is investing in low-yielding securities. Average loans contracted by less than 1%, to $686 billion. Though interest income was down 1% quarter to quarter, to $11.8 billion, noninterest revenue increased 12%, to $14.9 billion.
"If rates stay where they are you can continue to expect to see modest pressure" on margins, Douglas Braunstein, JPMorgan Chase's chief financial officer, said on a conference call with analysts on Thursday.
Loan sales shifted investments toward lower-yielding securities, he said. Deposits were up in treasury and commercial banking, but there are a lack of strong reinvestment opportunities. It does not want to take undue risk investing in higher-yielding securities.
Jamie Dimon, JPMorgan Chase's chief executive, said the bank would not sacrifice assets or deposits to protect the margin. It is poised for revenue growth as soon as interest rates rise because it has been building customer relationships and collecting deposits, he said.
"We don't look" at the net interest margin, Dimon told analysts. "We have profits, and we have clients. So the clients are the same as deposits. We don't want to turn them away if they're good clients."
Credit card income was up a surprising 25% quarter to quarter on higher card sales volume and merchant transactions. But card interest income fell 9%, and average card loans fell 6%. Commercial loans rose 2%, which was good for transactional income but less beneficial for loan-interest income.
Commercial lending and deposit fees rose 6%, while interest income increased 1%.
Investment banking profits of $2.1 billion beat expectations thanks largely to higher advisory fees, and debt and equity underwriting fees.
Results at the commercial banking unit were especially positive, Braunstein said, noting that it had "record revenues" of $1.6 billion.
Loans to midsize business increased, reflecting increased demand and market share gains, particularly in former Washington Mutual territory where it is aggressively expanding, he told analysts.
Commercial loan utilization rates continue to "remain low" but there was a "modest uptick" in midsize loan utilizations, Braunstein said.
Mortgages remained a problem in the quarter, though originations were relatively strong.
The bank set aside $2.3 billion to cover future mortgage litigation and foreclosure expenses, and it may not be done booking charges involving troubled borrowers.
"This is going to take time to fully play out, and we could incur additional expenses," Braunstein told reporters.
The housing market should improve in two years, even as prime mortgage losses rose and home prices fell during the quarter, Dimon estimated.
Foreclosures are elevated because of delays, which has reduced home values, he said. But delinquencies have been falling. "The housing market is not going to drive the economy; the economy is going to drive the housing market," Dimon said. "In reality, the housing market is getting a little bit stronger."
Dimon used his platform Thursday to urge a resolution to the standoff in Washington over the U.S. debt ceiling. It is "imperative" that ceiling be raised, he said. Right now, investors are acting from the assumption that it will be, he told reporters. "No one could tell me with certainty that a default wouldn't cause catastrophe," Dimon said. "Therefore it is irresponsible to take that chance. If it doesn't get resolved you will see severe impact in the markets as we get closer" to the early August default deadline, he said.
A potential downgrade of the U.S.'s high credit rating would be "manageable" but could "cause problems" by forcing some investors to sell government bonds that are no longer rated triple-A, Dimon said in the analyst call. A government default would spur sell-offs of government securities, too.
Dimon also played down the bank's exposure to the Greek-induced crisis in Europe.
JPMorgan Chase has about $15 billion of exposure across Europe, and would lose as much as $3 billion in a worst-case scenario, he said. A full-blown meltdown in Europe is unlikely, Dimon said. JPMorgan Chase's biggest exposure is in Italy, but it also has exposure to Greece, Ireland and Portugal. "We have big business in those countries" he told analysts. JPMorgan Chase intends "to be in those countries for a long time, so we're not going to cut and run," Dimon said in a separate call with analysts.