JPMorgan Chase: Likely Fairly Valued, But Well-Positioned To Keep Gaining Market Share
Contributor since 2011 / 19799 Followers
Summary:
- JPMorgan Chase outperformed on core earnings in Q2’24, with strong capital markets revenue offsetting weaker lending activity and higher provisioning.
- Capital markets should remain strong in 2024 and asset repricing at higher rates is a positive, but 2023-2026 pre-provision profit growth is likely to be lackluster despite strong ROTCEs.
- JPMorgan is almost untouchable from a quality standpoint and is well-placed to continue gaining share in banking, asset management, and payments, but the valuation is more “fair” than “discounted” now.
danielvfung
Betting against Jamie Dimon and JPMorgan Chase (NYSE:JPM) over the last five to 10 years has basically been an invitation to bleed money, as this leading money center bank has left even well-run rivals like Bank of America (BAC) and PNC Financial (PNC) far in the dust on the strength of its diverse businesses across consumer and commercial banking, payment and treasury services, trading and investment banking, and asset management.
Since my last article on the stock, where I did note that JPMorgan’s valuation wasn’t as compelling as several other banks, the shares actually underperformed, as Bank of America and Wells Fargo have caught up some of the valuation gap and Citigroup (C) is finally getting some of its due for the progress it has made. Even so, I wouldn’t call the 40%-plus appreciation “bad” and there’s nothing wrong with the business.
JPMorgan is in excellent shape to leverage a “the strong get stronger” long-term thesis, as the company’s IT budget is far beyond what most banks could hope to match and the company continues to reinvest in the business. I have no concerns around the business performance here, but I do find the valuation more of an issue now as it’s hard to argue that the shares are meaningfully undervalued.
Another Core Beat, Though Banking Has Definitely Slowed
Once again, JPMorgan posted a strong core earnings performance.
Overall adjusted revenue grew almost 8% year over year and 3% quarter over quarter, beating by about $0.26/share. Net interest income was modestly disappointing, missing by about $0.03/share on a nearly 2% sequential decline driven by weaker than expected earning asset growth (particularly loans). Net interest margin was stable with the year-ago period and down sequentially (from 2.71% to 2.62%), as deposit costs continue to rise (up about 4bp qoq) on the ongoing shift from non-interest-bearing deposits to interest-bearing deposits.
Non-interest income rose more than 11% yoy and almost 8% qoq, beating expectations by close to $0.29/share. Once again capital markets carried the day, and this has been a very important driver for large banks like Bank of America, Citi, and JPMorgan (and of growing importance at Wells Fargo). On an adjusted basis, investment banking revenue rose 39% yoy and 6% qoq, while trading revenue (ex DVA) climbed 7% yoy and contracted less than expected at 5% qoq.
Operating costs were lower than expected, both on an as-reported basis and in terms of efficiency ratio, leading to another $0.14/share of upside. All told, then, adjusted pre-provision profits rose 6% yoy and 2% qoq, beating expectations by $0.40/share and driving the quarterly beat (provisioning and taxes were worse than expected).
Within the Consumer and Community Banking business revenue rose 3% yoy and was steady on a sequential basis, with pre-provision profits down 7% yoy and 1% qoq. Lending was sluggish (flat sequentially), with a slight tick down in business and mortgage lending and growth really only coming from credit card loans (up almost 3%). Middle-market lending was also weak (down about 3% qoq), and I’ll be very interested to see what the regional banks do here.
Higher For Longer, With A Capital Markets Chaser
I don’t see any major changes to the main themes I expect for large banks this year. There is still going to be pressure on rates as customers move money out of no-interest accounts, though the bank will also benefit from repricing loans and securities at higher rates. If there was downside here, it was that JPMorgan didn’t once again boost its net interest guide for the year (I’m expecting around 2% growth this year, more or less in line with guidance).
Credit quality is going to continue to get worse from here, but JPMorgan doesn’t really seem to have outsized risks here. CRE is deteriorating faster than core commercial lending, but JPMorgan isn’t a huge office CRE lender (it is in absolute terms, but not as a percentage of loans) and the bank has been increasing its reserves.
Loan demand is likely to remain sluggish, and the soft commercial loan demand guidance for the second half of 2024 is arguably an incremental negative for the industrial sector and the economy as a whole (though I don’t know how many people still believe in the second half rebound hypothesis).
Capital markets is likely to be an ongoing driver for 2024. Investment banking activity (M&A, debt offerings, et al) continues to improve over a very weak 2023, and trading activity is likewise healthy .
The Strong Will Likely Get Stronger
How strong is JPMorgan right now?
The bank is producing best-in-class ROTCEs despite the drag of around $50B in excess capital. Adjust for that and the “real” like-for-like ROTCE would be in the low-20%’s, and the CCB business continues to generate mid-20%’s ROTCEs.
Likewise, the business has grown to the #1 deposit share-holder in the U.S. banking sector and management is targeting 20% share (versus around 11% today) over the long term, as the company continues to invest in new branches in new markets, cross-selling with cards and wealth management, and digital services. The bank is likewise the #1 player in cards and efforts from other banks to grow their card businesses doesn’t seem to be impacting their growth that much. There’s room to do better in commercial lending (and management is working on it), while treasury services remains a leader and the capital markets businesses likewise enjoy top share.
Starting from a position of strength isn’t to be underestimated. With a high-teens ROTCE management has the freedom to reinvest in the business and JPMorgan spends more on IT in a year than a large majority of banks in the country earn in annual revenue. With management talking about the possibility of AI “redefining” the cost structure for the industry, banks like Bank of America, JPMorgan, and Wells Fargo that can afford to throw billions into IT spending are likely to see the biggest benefits, further widening the competitive gap with smaller banks.
The Outlook
Higher for longer rates and a strong rebound in capital markets has driven higher 2024 estimates in my model, and likewise strong returns and growing share across its core banking businesses leads to higher long-term earnings expectations relative to my prior estimates. I’m looking for long-term core earnings growth in the neighborhood of 4%-5% and I expect capital returns to shareholders (dividends and buybacks) to continue outgrowing earnings over time.
Between discounted core earnings, ROTCE-driven P/TBV, and a P/E approach (using an 11.9x multiple on 12-month EPS), I get a fair value range between $195 and $213, suggesting to me that the shares are basically fairly valued.
The Bottom Line
At this point I can’t say that JPMorgan is undervalued, and I do expect smaller banks to outperform them in terms of core pre-provision growth as the rate cut cycle begins; I think it will be challenging for JPMorgan to get much above the low single-digits for PPOP growth from 2023 to 2026.
With JPMorgan already so popular but likely to see underwhelming core growth, it’s harder to call this a must-own today. I do think smaller banks are likely to start outperforming, but JPMorgan will likely always benefit from the flights to safety that occur along the way. There are worse things than owning fairly-valued shares of a superior company, but it’s harder to expect ongoing outperformance from this level.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of JPM either through stock ownership, options, or other derivatives. 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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