JPMorgan Chase opens the third quarter reporting season on October 13, and the large banks follow over the days after it. Consensus has the bank earning $5.86 a share on revenue near $50.8 billion.

Those two figures will be compared to the estimate, and whichever way they land will produce a headline. The lines worth reading are further down, because this is the first quarter in which the banks report with the policy rate having gone up rather than down, and with the ten year Treasury above 5.3%.

Net interest income is the whole business

A bank borrows short and lends long. Net interest income is the difference between what it earns on loans and securities and what it pays on deposits, and for a large commercial bank it is the majority of revenue. JPMorgan has guided to roughly $105.5 billion of total net interest income for the year, having raised that guidance through 2026.

Higher rates help the asset side immediately, because loans reprice. The question is always the liability side. Deposit beta, the share of a rate increase that a bank has to pass on to depositors, determines how much of the benefit it keeps. In the early part of a tightening cycle beta is low, customers leave money in checking accounts, and margins expand. As the cycle runs, money moves to savings accounts, money market funds and Treasury bills, and the benefit erodes.

This cycle has run for a long time with a brief interruption, so the interesting disclosure is not the headline margin but the mix: how much of the deposit base is still non interest bearing, and whether that share fell again this quarter.

Credit costs are where the labour market arrives

Whitmore's Watchlist:
BAC (Bank of America Corporation): The most deposit funded of the large banks, so the most geared to that mix question.
WFC (Wells Fargo & Company): Heavy in consumer lending and mortgages, where a softer labour market shows first.
IAT (iShares U.S. Regional Banks ETF): Regional banks, which carry more commercial property and less trading revenue.

Provisions for credit losses are forward looking by design: a bank books them when it expects losses, not when they happen. That makes the provision line the clearest statement management gives about what it thinks is coming.

JPMorgan has guided its card net charge off rate to about 3.2% for the year and described the credit environment as benign. The September employment report, with 29,000 jobs added and unemployment up to 4.2%, is the first data point that argues against that description. Card and auto losses track the labour market with a lag of a few quarters, so a change of tone here would matter more than the earnings number.

The other credit line to read is commercial property. Regional banks hold a disproportionate share of that debt, and the loans maturing now were written at rates well below what is available today, with the ten year where it is.

Trading revenue is the part that will not repeat

The second quarter produced record markets revenue at JPMorgan, up 35% on the year, with investment banking fees up 30%. Management said at the time that some of that reflected activity pulled forward and conditions that were exceptional.

Volatile markets are good for a trading desk, and this year has supplied plenty of volatility. The risk for an investor is treating a quarter like that as the run rate. A bank trading on a multiple of earnings that include a record trading quarter is more expensive than it looks, and the comparison next year becomes punishing.

So the useful way to read this week is to separate the three engines. Net interest income is the durable one and is being supported by the rate environment. Credit costs are the one that turns with the economy and currently look benign on data that is three months old. Trading is the one that flatters the quarter and reverses.

A bank that beats on trading and guides credit costs higher has had a worse quarter than the headline will say, and the reverse is also true.

Whitmore's Take: The provision line is management's forecast of the economy, stated in dollars, and it is the most informative sentence in the release. Worth reading it before the earnings per share figure rather than after.

Written by Daniel Whitmore
Millionaire Insiders