- JPMorgan posted solid financials on the prints, however, with sourness reflecting the revision of future macro outlook.
- I believe the US economy still has a margin of safety against the ongoing headwinds, allowing JPM to feel relatively sound with its diversified business lines.
- Although the valuation of JPM offers a moderate upside, I believe my bullish call will pay out once the positive outlook works out.
JPMorgan Chase (NYSE:JPM) delivered strong financial results in the recent quarter, albeit affected to some point by the more conservative macro outlook. I believe that the US economy still has a prominent margin of safety and, despite increased macro headwinds, it could avoid a prolonged downturn. The Fed pivot is broadly believed to take place this year, which should set in motion the suppressed investment banking activity. I am bullish on JPM as the diversified business model, as well as solid positions across the key business segments could walk the bank through a difficult environment with the strong financial readings on the prints.
The macro downturn hangs over, reflecting the uncertainty of increased geopolitical tensions, high inflation, the vulnerable position of the energy market and unprecedented tightening of monetary policy. Against this backdrop, the near-term outlook for the US banking sector appears clouded. However, JPMorgan’s executives see the US economy in a strong mode, where the consumers continue to spend money and business is in good shape. At the same time, the delinquency figures in loan portfolios are significantly below the pre-pandemic levels, and although growing in recent quarters, the payment discipline remains high.
JPM managed the fourth quarter on a strong note, topping the consensus on both the top- and bottom-line. Net revenue was up 17.2% YoY to $35.6 billion, as the net interest income surged by 48% YoY to $20.3 billion due to the increased lending activity and an 84bps net interest margin improvement to 2.47%. However, investment banking services and asset management were a drag on the performance, which led to an 8% YoY decrease in noninterest revenue and impacted the C&IB business line.
On the downside, net income was under significant pressure from a sharp increase in provisions for credit losses, compared to the net benefit last year, due to the worsening economic outlook and the bank’s mild recession view going forward.
Looking at the prospects, the investment banking division will likely underperform for a while. On the other hand, high interest rates and lending activity are benefiting the interest-bearing business of JPM, although the deposit repricing could put pressure on the net interest margin. At the same time, the Fed appears to have made some progress on inflation, which slowed to 6.4% (on annum) in January from its 9.1% peak in June. This prompts a slowdown in the Fed’s key rate at the following meetings. However, the interest rate hikes could still hit the 5-5.25% target range. In my view, the peak in rates is likely to appear in the rearview mirror in the second quarter of 2023, and by the end of the year the Fed will be able to move towards a gradual easing of monetary policy. This would result in the normalization of the financial markets, thus increasing the number of placements and M&A activity. The situation in the C&CB division is likely to remain favorable, as the normalization in the revolving balances continues, while per account balances are yet to reach pre-pandemic levels. The management noted in the earnings call the 7% increase in e-commerce spend, where the strong trends in the latter combined with the government’s digitalization push will drive more card payments.
What isolated JPMorgan from the sharp decline in investment banking line of business is diversification. With this I am moving to the point, and expect JPMorgan to confidently go through a challenging environment due to the strong and heterogenous LOBs, as well as solid positions in all major sectors, especially in credit cards, retail, business and investment banking. Although executives are not confident about the effect of the ongoing macro headwind, the long-term outlook remains positive. I believe that the US economy still has a margin of safety and prospects to avoid a serious and prolonged downturn. Against this background, JPM is well positioned to drive positive financials and work out on its 17% RoTCE target, although the financials in H1’23 will apparently remain not the strongest.
I addressed the valuation of JPM by comparing its valuation attractiveness to the peer group by forward dividend yield and P/E ratio. The comps are selected from Seeking Alpha and listed below.
During the quarter, JPMorgan returned $3 billion to the shareholders through dividends, thus bringing the annual payout to $4.0 per share. JPM also revealed that the expectation for 2023 net interest income is $73 billion, up nearly 10%. From the comp table, we could spot the JPM dividend yield of 2.8% slightly exceeding the sector’s median. I am bullish on the JPM prospects, so the calculations incorporate DPS of $4.20, as I believe the bank is able to make it a 9th consecutive year of dividend increase, as well as EPS of $13.7 for 2023, which is at the high-end of the analyst’s forecast. With the equal weight in between, the implied Mcap should be $440 billion, or $150 per share, which represents a moderate 5.5% upside from the current levels. Nonetheless, I am for a Buy on JPM stock, as the positive factors we delineated could work out going forward, making the bank an attractive investment opportunity. In addition, the CET1 surpassed the target level of 13%, which opens up the ability to resume buybacks and underpin the stock performance.
The bank sector is highly dependent on economic and market conditions. In the event of its further deterioration, a decrease in customer activity and demand for the bank’s services could be expected, as well as losses from provisions and a negative impact on capital adequacy ratios. The other uncertainty for JPM is stemming from the Basel III regulatory framework, which is yet to be released and is expected to emerge higher capital requirements. Although, there is hardly a concern for JPM to manage with the increased target capital ratio, the regulations could put pressure on the RoTCE of the bank, and restrain the capital distribution to shareholders.
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.