JPMorgan Is Clear Winner Amidst Panic-Driven Chaos

Summary:

• JPM produced a massive profit of $12.6B in Q1, or $4.10 per share on $39.3B of revenue.
• JPM is picking off valuable relationships, teams, and employees from weaker regional bank competitors.
• JPM is too high quality of a bank to trade at just over 10x normalized earnings, given its return profile, and counter-cyclical business footprint.

It’s hard to believe that is only been about a month since the SVB Financial collapse created an epic irrational panic about the U.S. banking industry. Panic propagandist pundits valuing all loans and investments marked to market, just in case all the depositors leave, as though that is a normal occurrence. It was not a coincidence that the stock market bottomed in March of 2009 right when mark to market accounting was suspended, as it simply becomes a doom loop that isn’t reflective of actual future cash flows. Just as we saw in Q1, MTM losses on AOCI can quickly reverse the other way as well, so you don’t want to overreact to short-term price changes one way or the other. Regardless of the economic environment or accounting rules, there is no doubt whatsoever that JPMorgan (NYSE:JPM) represents the epitome of the U.S. banking industry under the able stewardship of Jamie Dimon. Recent industry stress is actually playing into JPM’s hands in many ways, as the company is able to capture valuable employees and relationships from weaker competitors. Investors should be willing to buy JPM on any material dips.

On April 14th, JPM reported an absolutely massive 1st quarter of financial results, generating $12.6B in net income, and EPS of $4.10 on $39.3B in revenue. Revenue grew by 25% YoY, bolstered mostly by an increase in net interest income, while expenses grew by 5% YoY due to higher compensation costs. While so many doomsday pundits were highlighting how higher rates resulted in mark to market losses in bank investment portfolios, they seem to be forgetting about the rapid NII growth that has been occurring. If the economy does weaken further, causing rates to keep declining, those AOCI losses could reduce further, but it wouldn’t necessarily put the banks in a better position. I’ve commented many times about the myopia of the bank analyst community, as they typically can only focus on one metric at a time, such as net interest margins. The company delivered a stellar ROTCE of 23%, despite $868MM of net investment securities losses in corporate. Credit costs of $2.3B, included net charge-offs of $1.1B, mostly in card.

JPM was a significant beneficiary of the SVB Financial fallout, resulting in robust new account activity, and meaningful deposit and money market flows. Businesses with over $250K in deposits at smaller banks, might move secondary or even primary accounts over to JPM, which is seen as one of the safest institutions in the world. As banks such as First Republic (FRC) faced extreme pressure from deposits flowing out, JPM and other stronger competitors benefit from the migration of key wealth management teams. The company grew its IB fee wallet share and saw combined credit and debit card spending increase by 10% YoY, although that did weaken in the last few weeks of the quarter. JPM ended Q1 with a CET1 ratio of 13.8%, up about 60 basis points, largely due to the benefit of net income minus distributions, plus the AOCI gains from lower interest rates. The company bought back $1.9B in stock in the quarter. There is plenty more room for future buybacks given JPM’s prodigious income and capital generation.

The CCB results were phenomenal, with net income of $5.2B on $16.5B of revenue, up 35% YoY. Banking and Wealth Management revenue was up 67% YoY, mostly due to higher NII. Average deposits decline by 2% as customers migrated from savings accounts to higher-yielding products, but JPM is capturing a lot of that into its CDs and Wealth Management programs. Client investment assets were down 1% YoY, but up 7% QoQ. Home lending revenue was down 38% YoY. Card Services and Auto revenue was up 14% YoY, mostly due to higher Card NII on higher revolving balances, partially offset by lower auto lease income. Credit card spend grew by 13% YoY, while card outstandings were up 21% on new account growth and normalization in utilization. Auto originations were surprisingly solid at $9.2B, up 10% YoY. Expenses of $8.1B were up 5% YoY. Credit costs were $1.4B, due to reserve builds of $300MM in Card and $50MM in Home Lending. Net charge-offs were up $500MM YoY to $1.1B, upon normalization in delinquency levels.

The CIB posted $4.4B of net income on revenue of $13.6B, IB revenue of $1.6B was down 24% YoY on weaker activity levels, although JPM remained number 1 in wallet share of 8.7%. Debt underwriting was particularly weak, down 34%, off a tough comp when interest rates were a heck of a lot lower. Markets total revenue was down 4% YoY to $8.4B, off flat fixed income. Equity markets were weaker, down 12% YoY. Payments revenue was up 26% YoY, to $2.4B. If you exclude the net impact of equity investments largely due to a gain in the prior year, Payments was up 55% YoY, driven by higher rates.

The Commercial generated net income of $1.3B on revenue of $3.5B, was up 46% YoY due to higher NII. Expenses of $1.3B were up 16% YoY due to higher compensation expenses and technology. Loans were up 13% YoY and 1% sequentially. JPM management pointed out that office sector exposure is less than 10% of the portfolio and is focused on urban dense markets. Nearly two-thirds of its loans to multifamily are in supply-constrained markets. Credit costs were $417MM, with a net reserve build of $379MM, as the bank prepares for potential future weakening in the macro economy.

Asset & Wealth Management produced net income of $1.4B on revenue of $4.8B, with a pretax margin of 35%. Expenses of $3.1B were up 8% YoY. Net long-term inflows were $47B, and liquidity inflows were $93B, inclusive of the ongoing deposit migration. AUM of $3 trillion was up 2% YoY and total client assets were up 6% YoY to $4.3 trillion. Loans were down 1% QoQ, driven by lower securities-based lending, while average deposits were down 5%.

JPM made Wall Street very happy with 2023 NII and NII ex-markets to be roughly $81B. The increase in guidance was due largely by lower rate paid assumptions across both consumer and wholesale due to the expectations that the Federal Reserve will cut rates in the back half of 2023, along with slightly higher than expected card revolving balances. They balanced this guidance with the statement that a more sustainable medium-term outlook is NII below $80B, but the company doesn’t know when that would occur, so JPM will reap the benefits in the near-term. Expenses are still projected to be around $81B for the year, not including the pending FDIC special assessment. On credit, JPM expects the 2023 net charge-off rate to be approximately 2.6%, so credit is continuing to hold up better than most predicted.

After JPM’s blowout earnings, the stock rallied 7.55% to $138.73, or roughly 10.4x forward earnings. Book value and tangible book value per share ended Q1 at $94.34 and $76.69, respectively, so JPM trades at about 1.8x TBV. While this would be fair priced for most banks, I’d argue it is way too cheap for a bank with the quality and return profile of JPM. What is underappreciated about the big banks, and especially JPM is how many of the businesses are countercyclical. If credit and the macro economy weaken, the trading businesses tend to pick up the slack. When rates go down, the IB tends to see good revenue trends as companies issue bonds and make acquisitions. Higher rates might pressure the IB, but we are seeing clear benefits to net interest income. Using a relatively conservative estimate of normalized ROTCE of 17%, JPM would produce about $13 per share in earnings. At a 13x multiple, that would put the stock at about $169, which is about 22% higher than the current share price. That combined with a dividend of $4 per annum, or 2.88% make JPM a buy, particularly on any material dips.

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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