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Keep JPMorgan (JPM) on Your Radar Despite the 27% YTD Slide
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With all three major indexes hovering in the bear market territory, investors have adopted a cautious stance. The year 2022 commenced with a rise in COVID-19 cases due to the Omicron variant. Further, the ongoing Russia-Ukraine conflict, 40-year high inflation and aggressive monetary policy stance by the central banks globally have stoked the fears of economic slowdown/recession in the coming six-nine months.
These developments have resulted in declines in all the 11 major S&P 500 sectors except energy and utilities. The Financial Services sector, which is down 14.3% in the year-to-date period, is among the worst performers. Amid such a gloomy backdrop, investors must be on the lookout for stocks that are fundamentally well placed and will continue to thrive once the current headwinds cool off. One such company is JPMorgan Chase & Co. (JPM - Free Report) , the largest bank in the United States.
JPMorgan is a bellwether in the banking space, given the sheer size (serves more than 66 million U.S. households) and quality of its asset base and industry-leading franchises in investment, commercial and consumer banking. The company is well-poised to benefit immensely from higher interest rates. The company’s balance sheet is highly asset-sensitive, and rising rates will support top-line growth. In fact, management has provided a very optimistic outlook for net interest income (NII) this year.
Provided the high-single-digit loan growth (excluding CIB Markets & PPP) and the Fed Funds target rate reaching 3.5% by this year-end, management projects NII (excluding CIB Markets NII) to be more than $58 billion. This marks a jump of almost 30% on a year-over-year basis. Similarly, Wells Fargo expects NII to grow 20%, supported by higher interest rates.
Further, JPMorgan has been extensively investing in technology. While analysts and investors are raising questions over the effectiveness of excessive spending on technology (expected to be up nearly 25% year over year in 2022), management deems such costs as necessary to stay ahead of the competitors that include not only other banks but also technology firms. Overall, adjusted operating expenses are anticipated to rise 7% this year. Likewise, Citi expects costs to increase in the 5-6% range, excluding the divestiture impacts.
Let’s discuss other factors which show that JPMorgan is worth considering.
Fundamental Growth Drivers: After consolidating its branch network in 2018, JPMorgan announced an initiative to expand in new regions by opening branches. By 2021-end, it became the first bank to have a branch network in all contiguous 48 U.S. states from just 27 states in 2018.
This bodes well for the bank in garnering market share (U.S. retail deposits share for the Consumer & Community Banking unit rose to 10.3% in 2021 from 6.6% in 2011) and offers tremendous cross-selling opportunities in the card and auto loan sectors. JPMorgan also launched its digital retail bank Chase in the U.K. in 2021 while planning to expand its retail business in Germany. Also, it continues to expand its Corporate & Investment Banking and Asset & Wealth Management businesses in China.
JPMorgan is focused on acquiring the industry's best deposit franchise and strengthening its loan portfolio. Despite a challenging operating environment, deposits and loan balances have remained strong over the past several years. Though loan demand was subdued since the onset of the coronavirus pandemic in 2020, there has been a marked improvement in the same of late. For the six months ended Jun 30, 2022, total loans grew 6% year over year to $1.1 trillion, with a 17% rise in credit card loans.
The credit card business is turning out to be lucrative for JPM. The company’s market share in credit card sales has improved from 15.9% in 2006 to 22% at the end of 2021, making it one of the biggest players in the space. A decent economic growth should continue to drive demand for credit cards.
While rising rates and the expected global economic downturn will continue hampering investment banking (IB) business, JPMorgan’s leading position in garnering global IB fees will offer leverage to attract business compared with other investment banks. Also, ongoing macroeconomic concerns and geopolitical tensions should keep the markets volatile in the quarters ahead, helping the company earn measurable trading revenues (which account for almost 25% of its total net revenues).
Plans to Tackle Tech Threat: JPMorgan has been growing through on-bolt acquisitions, which will strengthen its operation through technological advancement. In 2021, it announced the buyout of 55ip, OpenInvest, Nutmeg and a 75% stake in VW Payments. It also partnered with Though Machine to scale quickly on the technology front. On similar lines, in 2022, the bank planned to buy a 49% stake in Greece-based Viva Wallet and Ireland-based Global Shares.
JPM recorded an approximately 25% jump in ‘tech and tech-adjacent’ costs over the last three years through 2021. The same is projected to increase almost 20% in 2022 on efforts to bolster cloud capabilities, digital consumer experience, data centers and data & analytics.
Attractive Valuation: At $115.90 per share, JPMorgan is currently trading at a price/tangible book value of 1.77X, way below the Zacks Finance sector average of 4.36X. Thus, the company’s beaten-down stock price and attractive valuation might be an attractive entry point for investors in a quality franchise.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Favorable Estimate Revision: Analysts seem bullish on the stock. Over the past week, the Zacks Consensus Estimate for earnings has moved marginally north for 2022 and 2023. Its projected long-term earnings per share growth rate is 5%.
Parting Assessment
Considering the company’s growth prospects, upbeat 2022 NII outlook and robust fundamentals, investors must watch the stock for long-term gains. Other positives in the JPMorgan story include well-regarded management, a robust balance sheet, on-bolt acquisitions to support fee income and reasonable valuation. Hence, the fundamentals of the nation’s largest bank by assets appear assertive enough to drive its stock higher over time.
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Keep JPMorgan (JPM) on Your Radar Despite the 27% YTD Slide
With all three major indexes hovering in the bear market territory, investors have adopted a cautious stance. The year 2022 commenced with a rise in COVID-19 cases due to the Omicron variant. Further, the ongoing Russia-Ukraine conflict, 40-year high inflation and aggressive monetary policy stance by the central banks globally have stoked the fears of economic slowdown/recession in the coming six-nine months.
These developments have resulted in declines in all the 11 major S&P 500 sectors except energy and utilities. The Financial Services sector, which is down 14.3% in the year-to-date period, is among the worst performers. Amid such a gloomy backdrop, investors must be on the lookout for stocks that are fundamentally well placed and will continue to thrive once the current headwinds cool off. One such company is JPMorgan Chase & Co. (JPM - Free Report) , the largest bank in the United States.
This Zacks Rank #3 (Hold) stock has lost 26.8% so far this year, which is substantially wider than the S&P 500’s decline of 18.7% and other major banks like Citigroup’s (C - Free Report) 19.5% and Wells Fargo’s (WFC - Free Report) 8.6% fall. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
JPMorgan is a bellwether in the banking space, given the sheer size (serves more than 66 million U.S. households) and quality of its asset base and industry-leading franchises in investment, commercial and consumer banking. The company is well-poised to benefit immensely from higher interest rates. The company’s balance sheet is highly asset-sensitive, and rising rates will support top-line growth. In fact, management has provided a very optimistic outlook for net interest income (NII) this year.
Provided the high-single-digit loan growth (excluding CIB Markets & PPP) and the Fed Funds target rate reaching 3.5% by this year-end, management projects NII (excluding CIB Markets NII) to be more than $58 billion. This marks a jump of almost 30% on a year-over-year basis. Similarly, Wells Fargo expects NII to grow 20%, supported by higher interest rates.
Further, JPMorgan has been extensively investing in technology. While analysts and investors are raising questions over the effectiveness of excessive spending on technology (expected to be up nearly 25% year over year in 2022), management deems such costs as necessary to stay ahead of the competitors that include not only other banks but also technology firms. Overall, adjusted operating expenses are anticipated to rise 7% this year. Likewise, Citi expects costs to increase in the 5-6% range, excluding the divestiture impacts.
Let’s discuss other factors which show that JPMorgan is worth considering.
Fundamental Growth Drivers: After consolidating its branch network in 2018, JPMorgan announced an initiative to expand in new regions by opening branches. By 2021-end, it became the first bank to have a branch network in all contiguous 48 U.S. states from just 27 states in 2018.
This bodes well for the bank in garnering market share (U.S. retail deposits share for the Consumer & Community Banking unit rose to 10.3% in 2021 from 6.6% in 2011) and offers tremendous cross-selling opportunities in the card and auto loan sectors. JPMorgan also launched its digital retail bank Chase in the U.K. in 2021 while planning to expand its retail business in Germany. Also, it continues to expand its Corporate & Investment Banking and Asset & Wealth Management businesses in China.
JPMorgan is focused on acquiring the industry's best deposit franchise and strengthening its loan portfolio. Despite a challenging operating environment, deposits and loan balances have remained strong over the past several years. Though loan demand was subdued since the onset of the coronavirus pandemic in 2020, there has been a marked improvement in the same of late. For the six months ended Jun 30, 2022, total loans grew 6% year over year to $1.1 trillion, with a 17% rise in credit card loans.
The credit card business is turning out to be lucrative for JPM. The company’s market share in credit card sales has improved from 15.9% in 2006 to 22% at the end of 2021, making it one of the biggest players in the space. A decent economic growth should continue to drive demand for credit cards.
While rising rates and the expected global economic downturn will continue hampering investment banking (IB) business, JPMorgan’s leading position in garnering global IB fees will offer leverage to attract business compared with other investment banks. Also, ongoing macroeconomic concerns and geopolitical tensions should keep the markets volatile in the quarters ahead, helping the company earn measurable trading revenues (which account for almost 25% of its total net revenues).
Plans to Tackle Tech Threat: JPMorgan has been growing through on-bolt acquisitions, which will strengthen its operation through technological advancement. In 2021, it announced the buyout of 55ip, OpenInvest, Nutmeg and a 75% stake in VW Payments. It also partnered with Though Machine to scale quickly on the technology front. On similar lines, in 2022, the bank planned to buy a 49% stake in Greece-based Viva Wallet and Ireland-based Global Shares.
JPM recorded an approximately 25% jump in ‘tech and tech-adjacent’ costs over the last three years through 2021. The same is projected to increase almost 20% in 2022 on efforts to bolster cloud capabilities, digital consumer experience, data centers and data & analytics.
Attractive Valuation: At $115.90 per share, JPMorgan is currently trading at a price/tangible book value of 1.77X, way below the Zacks Finance sector average of 4.36X. Thus, the company’s beaten-down stock price and attractive valuation might be an attractive entry point for investors in a quality franchise.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Favorable Estimate Revision: Analysts seem bullish on the stock. Over the past week, the Zacks Consensus Estimate for earnings has moved marginally north for 2022 and 2023. Its projected long-term earnings per share growth rate is 5%.
Parting Assessment
Considering the company’s growth prospects, upbeat 2022 NII outlook and robust fundamentals, investors must watch the stock for long-term gains. Other positives in the JPMorgan story include well-regarded management, a robust balance sheet, on-bolt acquisitions to support fee income and reasonable valuation. Hence, the fundamentals of the nation’s largest bank by assets appear assertive enough to drive its stock higher over time.