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The Road Ahead for JPMorgan (JPM) Amid Improving Economy
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At annual Investors’ Day conference, JPMorgan’s (JPM - Free Report) management discussed the current macroeconomic backdrop and the path the company is taking to enhance profitability over the medium term. Also, the company provided first-quarter and full-year 2018 guidance.
Along with this, the company provided details about how the newly implemented Tax Cuts and Jobs Act will affect its financials going forward. While, lower taxes will decrease the income tax expense for the company, the same will have a slightly negative impact on net interest income (NII). However, this decline in NII is expected to be partly offset by the rising rate environment and loan growth.
Notably, JPMorgan set its medium-term targets of cost-to-revenue ratio of 55% (despite continued investments in franchise), return on tangible common equity (ROTCE) of nearly 17%, net payout ratio of 100% and Common Equity Tier 1 (CET1) ratio of 11-12%.
Further, JPMorgan expects pre-tax income to be nearly $44-$47 billion over the medium term, up from $40 billion recorded in 2017.
First-Quarter and 2018 Guidance
Net Interest Income: In first-quarter 2018, JPMorgan’s NII will be down modestly on a sequential basis due to the impact of the change in tax rates and a lower day count. For 2018, NII will come in the range of $54-$55 billion (up from $50 billion in 2017), benefiting from loan growth and higher rates.
Average core loan growth (excluding CIB loans) is expected to be in the range of 6-7% in 2018.
Non-interest income: Management projects first-quarter market revenues to increase mid to high single-digit rate on a year-over-year basis, based on market conditions. Further, investment banking is anticipated to remain stable or increase slightly year over year.
The new revenue recognition accounting rule is expected to increase 2018 non-interest revenues by nearly $1.2 billion, with the majority of impacts on the Asset & Wealth Management segment. Excluding this impact, non-interest revenues for the full-year are projected to be up 7%.
Operating Expenses: The new revenues recognition accounting rule is expected to increase 2018 expenses by nearly $1.2 billion with the majority of impacts on the AWM segment. Excluding this impact, JPMorgan expects adjusted expenses to be less than $62 billion.
Effective Tax Rate: As a result of the Tax Cuts and Jobs Act, 2018, effective tax rate is expected to be in the range of 19-20%.
This lower effective tax rate is expected to reduce tax-equivalent revenues and income tax expenses by $1.2 billion on an annual run-rate basis.
Credit Quality: JPMorgan expects net charge-off (NCOs) rate in 2018, to be relatively flat across the wholesale and consumer segments. On the other hand, NCOs rate in Cards is expected to increase to 3.25% in 2018 from 2.95% in 2017, due to the seasoning of newer origination vintages.
Our Take
Given the higher rates and persistent loan growth, JPMorgan remains well positioned for further growth in NII. While a slowdown in trading activities along with other factors has hurt the company’s non-interest income over the past few years, the expectation of a rise in markets as well as investment banking revenues might have some positive impact on total fee income in the quarters ahead.
Given the upbeat outlook and improving operating environment, the company has plenty of upside left. JPMorgan’s shares have gained 23.9% in 2017, outperforming the industry’s growth of 18.8%.
Some other major banking stocks carrying the same Zacks Rank include Citigroup (C - Free Report) , BB&T Corp. and Comerica Inc. (CMA - Free Report) .
Citigroup has witnessed an upward earnings estimate revision of 6.8% for the current year over the past 60 days. Also, its share price is up 24.1%, over the past year.
BB&T’s earnings estimates have been revised upward by 12.1% for the current year in the past 60 days. Also over the past year, its share price increased 10.6%.
Comerica recorded an upward earnings estimate revision of 17.7% for the current year in the past 60 days. Also, its share price has seen a 32.2% rise over the last year.
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The Road Ahead for JPMorgan (JPM) Amid Improving Economy
At annual Investors’ Day conference, JPMorgan’s (JPM - Free Report) management discussed the current macroeconomic backdrop and the path the company is taking to enhance profitability over the medium term. Also, the company provided first-quarter and full-year 2018 guidance.
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Along with this, the company provided details about how the newly implemented Tax Cuts and Jobs Act will affect its financials going forward. While, lower taxes will decrease the income tax expense for the company, the same will have a slightly negative impact on net interest income (NII). However, this decline in NII is expected to be partly offset by the rising rate environment and loan growth.
Notably, JPMorgan set its medium-term targets of cost-to-revenue ratio of 55% (despite continued investments in franchise), return on tangible common equity (ROTCE) of nearly 17%, net payout ratio of 100% and Common Equity Tier 1 (CET1) ratio of 11-12%.
Further, JPMorgan expects pre-tax income to be nearly $44-$47 billion over the medium term, up from $40 billion recorded in 2017.
First-Quarter and 2018 Guidance
Net Interest Income: In first-quarter 2018, JPMorgan’s NII will be down modestly on a sequential basis due to the impact of the change in tax rates and a lower day count. For 2018, NII will come in the range of $54-$55 billion (up from $50 billion in 2017), benefiting from loan growth and higher rates.
Average core loan growth (excluding CIB loans) is expected to be in the range of 6-7% in 2018.
Non-interest income: Management projects first-quarter market revenues to increase mid to high single-digit rate on a year-over-year basis, based on market conditions. Further, investment banking is anticipated to remain stable or increase slightly year over year.
The new revenue recognition accounting rule is expected to increase 2018 non-interest revenues by nearly $1.2 billion, with the majority of impacts on the Asset & Wealth Management segment. Excluding this impact, non-interest revenues for the full-year are projected to be up 7%.
Operating Expenses: The new revenues recognition accounting rule is expected to increase 2018 expenses by nearly $1.2 billion with the majority of impacts on the AWM segment. Excluding this impact, JPMorgan expects adjusted expenses to be less than $62 billion.
Effective Tax Rate: As a result of the Tax Cuts and Jobs Act, 2018, effective tax rate is expected to be in the range of 19-20%.
This lower effective tax rate is expected to reduce tax-equivalent revenues and income tax expenses by $1.2 billion on an annual run-rate basis.
Credit Quality: JPMorgan expects net charge-off (NCOs) rate in 2018, to be relatively flat across the wholesale and consumer segments. On the other hand, NCOs rate in Cards is expected to increase to 3.25% in 2018 from 2.95% in 2017, due to the seasoning of newer origination vintages.
Our Take
Given the higher rates and persistent loan growth, JPMorgan remains well positioned for further growth in NII. While a slowdown in trading activities along with other factors has hurt the company’s non-interest income over the past few years, the expectation of a rise in markets as well as investment banking revenues might have some positive impact on total fee income in the quarters ahead.
Given the upbeat outlook and improving operating environment, the company has plenty of upside left. JPMorgan’s shares have gained 23.9% in 2017, outperforming the industry’s growth of 18.8%.
Currently, JPMorgan carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some other major banking stocks carrying the same Zacks Rank include Citigroup (C - Free Report) , BB&T Corp. and Comerica Inc. (CMA - Free Report) .
Citigroup has witnessed an upward earnings estimate revision of 6.8% for the current year over the past 60 days. Also, its share price is up 24.1%, over the past year.
BB&T’s earnings estimates have been revised upward by 12.1% for the current year in the past 60 days. Also over the past year, its share price increased 10.6%.
Comerica recorded an upward earnings estimate revision of 17.7% for the current year in the past 60 days. Also, its share price has seen a 32.2% rise over the last year.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>