JPMorgan Chase: Solid As A Rock

Summary:

• JPMorgan has been regarded as a stronghold in these times of uncertainty.
• The bank is well-capitalized and likely sees near-term deposit inflows.
• Over time, competition for deposits keeps increasing, although the bank already pays a relatively decent rate, as it appears.

Shares of JPMorgan Chase (NYSE:JPM) have seen an interesting week amidst the debacle around SVB Financial Group (SIVB). In this period of turmoil, shares lost about $10, but shares rallied some $3 on the final trading day of the week when many regional banks were setting fresh lows. This was driven by the news that JPMorgan Chase was actually receiving quotes to accept deposits from clients which bank at its peers, as depositors were looking to move deposits to more creditworthy banks.

The Problem For Banks

Right now, there are two items in banking which are key and quite connected. On the one hand is the fact that banks were rich on deposits in recent years and that the Fed started raising rates aggressively over the past year, leaving banks to be slow to increase their rates on deposits. This has gradually resulted in an outflow in deposits, in part an intent by the industry at large, but as the gap with interest rates is large and investors considering risks, they likely will have to pay up for deposits in a big way.

The other issue is that of the impact of higher interest rates on the asset side of the balance sheet, notably with regard to loans made and assets/securities held until maturity. Especially if these assets are fixed in terms of their rate and have a long-term duration involved, this makes the banks incur significant losses on these investments.

That is no issue if banks are regarded as quality and see no deposit outflows, but in the case of SVB, fleeing depositors made that some of these assets would need to be liquidated. Preventing this is key, and while SVB was a special and high risky case because of their investment practices and more fluent depositor base, it is these same trends which impact the industry at large.

A Look At JPMorgan

JPMorgan has seen a year of stabilization in 2022, with a lot of underlying moving trends. Full-year revenues rose 6% to $128 billion, although that fourth quarter revenues rose 18% to nearly $35 billion. This acceleration of growth was the result of strong net income growth as a result of the rising interest rate environment, working down quicker in the asset base of the bank rather than the liability (mostly deposit) base. The bank posted a full-year profit of $37 billion, about $10 billion lower than the year before as JPMorgan took more than $6 billion in credit loss provisions, up from a $9 billion reversal in the year before.

Looking at the balance sheet, we see the total balance sheet being down 2% to $3.7 trillion for 2022. The company has made some $1.13 trillion in loans, up 5% from the year before.

These assets were mostly financed by $2.34 billion in deposits, actually down 5% from the year before. This is despite the fact that fourth quarter net interest expenses of $12.9 billion increased a factor of ten times from the year before. If we annualise these expenses, they trend at more than $50 billion, which in relation to the total deposit base (including non-interest-bearing expenses) comes in at just over 2%. That is not fair as the expense includes non-deposit-related interest rates as well, with the bank paying interest-bearing deposits at a rate of nearly 1.4%.

This is far below Treasury rates but is far higher than some other banks which pay less than a percent. Moreover, the solid earnings power of the bank provides plenty of room to forego some earnings to pay a more compelling deposit rate, but note that this is higher already than peers and the bank reportedly has seen some deposit inflows here.

Other than more than a trillion in loans, which have some duration risks as well, there are $631 billion in investment securities showing up on the balance sheet. These are comprised out of available-for-sale and held-to-maturity securities, combined down 6% from the year before. While the company will likely see some losses on these, which have not been quantified in the case of JPMorgan, I see no issue here. The bank benefits from liquidity provided by a more stable deposit base and moreover nearly $300 billion in shareholder equity.

Quite Strong

Looking at the bank, I am quite pleased with what I see at JPMorgan as the company comes from a position of strength, is well-perceived, is very large, and already pays a higher rate of the deposit base, while losses on investment securities are likely there, have not been quantified, but in all likelihood are very manageable.

Given all this, I think that the bank is doing very well, and in fact likely sees a short-term benefit from deposits flowing in, although this has not officially been reported, nor has it been quantified. I want to stress that the situation is in no way comparable to SVB Financial Group, which had a mismanaged assets-liabilities mix. Moreover, its depositor base, which consists of higher deposit amounts (not insured by the FDIC), and many (technology) corporations which post losses and hence cause natural outflows, (with the VC and IPO market being effectively closed).

Reality is that JPMorgan Chase is still the strong rock in the banking sector, as this premium is actually the driver behind deposit inflows here and makes that shares hold up very well. Nonetheless, the overall impact is a clear negative for the industry at large, with interest margins set to compress meaningfully, in the base scenario. The only silver lining is that interest rates have fallen as well, making the gap between treasuries has come down, without banks necessarily having to raise the deposit rates.

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.

If you like to see more ideas, please subscribe to the premium service “Value in Corporate Events” here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!