Michael M. Santiago
JPMorgan Chase’s (NYSE:JPM) position as the preeminent U.S. bank was highlighted earlier this year when some mid-sized regional banks suffered deposit runs as their customers panicked when Silicon Valley Bank and Signature Bank failed in March.
With its fortress balance sheet, other banks turn to JPM for assistance. One of those banks that found itself in trouble was First Republic Bank (OTCPK:FRCB). JPMorgan (JPM) agreed to pay $10.6B to acquire First Republic to avert its collapse.
JPM’s reputation helped its stock outperform peers. JPMorgan (JPM) rose 19% YTD, compared with the KBW Nasdaq Bank Index, which dropped 13% during the same period, and the Financial Select Sector SPDR ETF (XLF), which gained 6.7%. Still, 2023 proved a disappointing year for financial stocks, as higher interest rates constrained demand for loans, M&A, and capital markets activity. The S&P 500 has risen 21% so far.
Ratings Assessment: The bank’s sterling image doesn’t come cheap, though. SA’s Quant system rates JPMorgan (JPM) a Hold, as low grades in valuation and growth weigh on its overall score.
SA Analysts are more bullish, with nine of them rating JPM a Buy or Strong Buy. Only one SA Analyst gives the bank a Hold rating and none give it a Sell
Wall Street analysts also have an average Buy rating, with nine Strong Buys, six Buys, and 10 Holds.
JPMorgan’s (JPM) Q3 2023 earnings came in stronger than the average Wall Street estimate as net interest income exceeded expectations and credit losses were lower than analysts expected, both measures that are expected to “normalize over time,” said Chairman and CEO Jamie Dimon. The lender has a solid track record of beating consensus estimates, with EPS topping the average analyst estimate 10 times of the past 12 quarters. Over that period, JPMorgan beat the consensus estimate by an average of ~16%.
Sustainable NII: As the Federal Reserve is expected to start cutting rates sometime next year, banks’ net interest income (“NII”) is also expected to decline. At at recent industry conference Jeremy Barnum, JPMorgan’s (JPM) chief financial officer, discussed medium-term NII of ~$80B as a sustainable level vs. ~$88.5B NII expected for full-year 2023.
For 2024, the company is expected to earn $15.38 per share, down from the $16.79 it’s expected to earn in 2023 and up from the $12.90 it earned in 2022.
Evercore ISI analyst Glenn Schorr expects the bank’s formidable position will enable it to weather potential credit deterioration and proposed stricter regulations on capital requirements that are overhanging all of the biggest U.S. banks.
“Make no mistake, unforeseen credit deterioration and reg capital increases would be unpleasant, but JPM has both excellent credit metrics/FICO profiles and an enormous earnings machine that can eventually satisfy the 25% increase to CET1 capital needs in a couple quarters should Basel III endgame rules pass as is,” Schorr wrote after JPM’s Q3 earnings were released in October.
Caution creeps in: SA Investing Group Leader Envision Research is a bit more cautious on concern that the bank is “over-earning” on net interest income and is incurring “below normal” credit costs. In addition, the stock is trading at a valuation premium. “I see both positive catalysts (differentiating business model and superb profitability) and negative catalysts (the possibility of over-earnings and premium valuation) for JPMorgan Chase & Co. (JPM) stock. Due to these conflicts, I do not see a clear direction of its total potential in the near future,” Envision Research said.
SA Analyst Muhammad Umair takes a decidedly more bullish view. “The technical analysis of JPMorgan’s stock reveals a promising outlook. The stock’s price movement within a rising trend and the formation of a bullish inverted head and shoulders suggest the potential for continued upward momentum,” he wrote.