JPMorgan Chase: Even The Banking Leader Needs A Break

Summary:

• JPMorgan Chase investors have outperformed their financial sector peers since the market bottom in October/November.
• The bank expects $90B in full-year net interest income in 2024 but cautions that it has likely reached its peak.
• JPMorgan anticipates a more robust market environment in 2024 and believes it is well-positioned to leverage the resurgence in the private credit market.
• I explain why JPM remains a solid bet, given its scale and market leadership – but not at this valuation.
• Even a top banking stock like JPM needs to take a well-deserved break occasionally for bullish optimism to dissipate.

I downgraded JPMorgan Chase & Co. (NYSE:JPM) stock in December 2023, as I anticipated the most attractive risk/reward would likely be behind us, given its remarkable recovery. JPM has continued outperforming its financial sector (XLF) peers since the October/November broad market bottom. As a result, I assessed that JPM’s market leadership has been instrumental in lifting its outperformance.

JPMorgan posted solid guidance at its fourth-quarter earnings release in January 2024. Accordingly, the bank expects $90B in full-year net interest income or NII this year, notwithstanding the anticipated policy rate cuts by the Fed. Furthermore, JPMorgan management articulated its conviction of six rate cuts, demonstrating the resilience in its internal outlook. JPMorgan’s NII ex-markets guidance of $88B for 2024 suggests that we have likely seen the peak in its $94B NII exit rate in Q4. As a result, management cautioned investors to remain realistic as JPMorgan has been “over-earning” on its NII over the past year. However, management was reticent in providing a guide toward its midcycle $80B metric. While I believe near-term caution over the peak in JPMorgan’s NII metric is justified, the bank’s well-diversified segments should undergird a more progressive adjustment. Furthermore, the recent economic data suggests that a six rate-cut expectation is overstated, as a March rate cut is no longer the consensus. Therefore, JPMorgan’s ability to sustain a relatively high NII below its cycle peak should lift investor sentiments.

Moreover, JPMorgan anticipates a more robust market environment in 2024, as management doesn’t expect a recession to unfold. The IMF’s 2024 outlook suggests a slower growth cadence for the US economy but doesn’t anticipate a recession. Despite that, it’s also critical to note that the economists’ consensus about recession forecasting over the past year has been inaccurate. Therefore, investors are urged to account for higher execution risks, notwithstanding JPMorgan’s wide-moat business model.

JPMorgan also believes it’s well-positioned to leverage the resurgence in the private credit market. However, regulatory hurdles attributed to the Basel III endgame could introduce higher capital requirements, affecting the profitability of JPMorgan and its leading peers. Despite that, given its scale, a more constructive economic outlook should provide more opportunities for JPMorgan to capitalize on. Management articulated confidence in “competing effectively in traditional syndicated lending businesses and with private credit providers.” As a result, JPMorgan can leverage its scale to outperform direct lenders by providing “both the best possible pricing and speed/certainty of execution.” I wouldn’t rule out JPMorgan’s ability to penetrate and gain share in these potential new growth vectors, mitigating the NII cycle peak moving ahead.

Revised analysts’ estimates suggest a 2% contraction in JPMorgan’s adjusted EPS for 2024. Following last year’s 34% gain as the bank benefited from the Fed rate hikes, it’s hardly a disaster. While comping more challenging YoY metrics, investors must consider that the growth normalization phase could continue through 2025, with analysts’ estimates suggesting flat YoY growth for FY25. As a result, I assessed that buying sentiments over JPM could be tempered since its valuation has already normalized in line with its 10Y average.

Accordingly, JPM is valued at a forward adjusted EPS multiple of 11.2x, slightly below its 10Y average of 11.6x. In addition, JPM’s “D” valuation grade assigned by Seeking Alpha Quant indicates a premium valuation relative to its financial sector peers. Therefore, with JPMorgan potentially entering two full years of a tepid adjusted EPS growth adjustment, I urge investors to remain cautious about being too bullish here.

Rating: Maintain Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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