Digital engagement and fee income drive growth, but rising credit loss provisions and management’s cautious tone signal margin risks for the next quarter.

($JPM) Digital Growth Offsets Credit Risk Concerns

# Digital Momentum and Fee Income Drive Cautious Optimism for Next Quarter

## Executive Summary

We maintain a **Bullish** outlook for the upcoming quarter, driven by **robust digital engagement** and **continued strength in fee-based businesses**. Q1 2025 revenue growth of **8% YoY** to **$45.3B** and a **21% YoY increase in Markets revenue** signal positive momentum, particularly in Commercial & Investment Bank (CIB) and Asset & Wealth Management (AWM). However, the market may be underestimating the **impact of rising credit loss provisions**—up **75% YoY**—on Consumer & Community Banking (CCB) margins. The key risk is that further credit deterioration could offset gains from digital and fee income growth.

## Recent Trends Signal What’s Next

Recent quarters show a **clear acceleration in revenue and digital KPIs**, but also a **rising cost of risk**. The last four quarters reveal:

| Quarter   | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|-----------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024   | 41.8         | 68               | 38                   | 27            | 3.12    |
| Q3 2024   | 43.0         | 69               | 39                   | 28            | 3.28    |
| Q4 2024   | 44.1         | 70               | 40                   | 29            | 3.45    |
| Q1 2025   | 45.3         | 71               | 40                   | 29            | 3.52    |

**Trend:**  
- **Revenue** has grown sequentially each quarter, with **Q1 2025 up 8% YoY**.
- **Operating margin** has stabilized at **40%**, but net margin is flat, reflecting higher credit costs.
- **EPS** growth is moderating, suggesting incremental margin pressure.

## Management’s Forward Tone and Positioning

Management’s recent commentary is **measured but constructive**. In the Q1 2025 call, the CEO stated, *“We’re seeing early signs of normalization in demand, but remain vigilant on credit quality.”* This contrasts with last quarter’s more upbeat tone, indicating a **shift toward caution**. The CFO added, *“We are prepared for a range of macro outcomes and are focused on disciplined expense management.”* The emphasis on “preparedness” and “discipline” signals a **defensive posture**—a notable change from prior quarters’ focus on growth.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for the next quarter are:

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Active Digital Customers   | 68.4M   | 71.2M   | 72.5M   | +6%        | +2%        |
| Mobile Customers           | 54.6M   | 58.1M   | 59.0M   | +8%        | +2%        |
| AUM ($T)                   | 3.57    | 3.98    | 4.10    | +15%       | +3%        |
| Credit Loss Provisions ($B)| 1.89    | 2.85    | 3.30    | +75%       | +16%       |

**Implications:**  
- **Digital and mobile growth** will likely drive higher fee income and transaction volumes, supporting top-line growth.
- **AUM expansion** underpins recurring revenue in AWM.
- **Rising credit loss provisions** are a headwind for CCB margins and could limit EPS upside.

## Missed by the Street

A **subtle but important signal** is management’s repeated reference to “cost control” and a **decline in the overhead ratio to 52%** (from 54% YoY). This suggests that **expense discipline could deliver incremental margin improvement**—a factor not fully reflected in consensus models. Additionally, the focus on regulatory reform hints at potential capital efficiency gains.

## Scenarios for the Upcoming Quarter

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|---------|----------------------|------------------------------------------------------|
| Bull     | 48.5–49.0    | 3.80–3.95 | 41–43               | Strong IB fees, digital adoption, stable credit costs |
| Base     | 47.0–48.0    | 3.60–3.75 | 39–41               | Steady AUM, moderate CCB cost pressure               |
| Bear     | 46.0–47.0    | 3.30–3.50 | 36–38               | Elevated credit provisions, further CCB margin squeeze|

**Most Likely:**  
The **Base case** is most probable, given current digital and AUM trends, but with ongoing credit risk and cost headwinds.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter   | Revenue ($B) | EPS ($) | Operating Margin (%) |
|-----------|--------------|---------|----------------------|
| Q2 2024   | 41.8         | 3.12    | 38                   |
| Q3 2024   | 43.0         | 3.28    | 39                   |
| Q4 2024   | 44.1         | 3.45    | 40                   |
| Q1 2025   | 45.3         | 3.52    | 40                   |

### KPI Movement Table

| KPI                        | Q1 2024 | Q1 2025 | YoY Change |
|----------------------------|---------|---------|------------|
| Active Digital Customers   | 68.4M   | 72.5M   | +6%        |
| Mobile Customers           | 54.6M   | 59.0M   | +8%        |
| AUM ($T)                   | 3.57    | 4.10    | +15%       |
| Credit Loss Provisions ($B)| 1.89    | 3.30    | +75%       |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, but remain vigilant on credit quality.”**  
   *Q1 2025 Earnings Call* — Signals caution on loan performance.

2. **“We are prepared for a range of macro outcomes and are focused on disciplined expense management.”**  
   *Q1 2025 Earnings Call* — Emphasizes cost control and risk readiness.

3. **“Digital engagement continues to set new records, driving fee income and client retention.”**  
   *Q1 2025 Earnings Call* — Highlights digital as a revenue driver.

4. **“Credit loss provisions increased, reflecting a more conservative stance in consumer lending.”**  
   *Q1 2025 10-Q* — Indicates ongoing credit risk.

5. **“We expect to maintain our capital return program while investing in technology.”**  
   *Q1 2025 Earnings Call* — Suggests confidence in capital strength.

6. **“Cost control remains a top priority as we navigate a dynamic environment.”**  
   *Q1 2025 Earnings Call* — Reinforces margin focus.

7. **“Regulatory reform could unlock further capital efficiency in the coming quarters.”**  
   *Q1 2025 10-Q* — Points to potential upside from regulatory changes.

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**Bottom Line:**  
**Digital and fee-based growth** are likely to offset **credit and cost headwinds** in the near term. Investors should watch for further signals on credit quality and expense discipline as key swing factors for the next quarter’s results.