VALUATION HIGHLIGHTS

1. Consumer & Community Banking constitutes 38% of the Trefis price estimate for JPMorgan Chase's stock.
2. Corporate & Investment Bank (Advisory & Underwriting Services, Sales & Trading, Treasury & Securities Services) constitutes 33% of the Trefis price estimate for JPMorgan Chase's stock.
3. Commercial Banking constitutes 15% of the Trefis price estimate for JPMorgan Chase's stock.

WHAT HAS CHANGED?

Latest Earning

In Q4 2023, JPMorgan reported Total Revenues of $38.6 billion, which was 12% more than the year-ago period. This was primarily driven by a 15% growth in Consumer & Community Banking and an 18% rise in commercial banking revenues.

Consumer spending levels improved in 2022. Further, the interest rates increased in the year due to the Fed rate hike, leading to higher net interest income for the bank. On the flip side, the provisions for loan losses witnessed an unfavorable increase due to the tough macroeconomic conditions. Overall, it posted total revenues of $128.7 billion in FY2022.

The company posted total revenues of $158.1 billion in FY 2023 - up 23% y-o-y.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of JPMorgan's value that present opportunities for upside or downside to the current Trefis price estimate for the banking group:

Sales & Trading

• Yield on FICC Trading Securities: JPMorgan's FICC trading yield was around 4.6% in 2022. While we estimate yield figures to normalize around 4.3% in the long run, should the division perform worse than expected in the coming years, the yield could decrease to below 3% over the Trefis forecast period. If that were to occur, there would be a downside of roughly 3% to the Trefis price estimate.
• Investment Banking Operating Margins: JPMorgan's investment banking was 41% in 2022. We expect margins to remain around the current levels over the Trefis forecast period.

BUSINESS SUMMARY

JPMorgan Chase is a diversified financial services institution with operations worldwide. The largest bank in the U.S. in terms of total assets, JPMorgan is a leader in providing credit & debit cards and mortgages as well as investment banking, wealth management, and sales & trading services. Through its various business segments, JPMorgan serves millions of customers in the U.S. and many of the world's most prominent corporate, institutional, and government clients across the globe.

SOURCES OF VALUE

Diversified business model driving sustained growth

JPMorgan is a market leader in nearly every financial service, including retail banking, commercial banking, investment banking, and custody banking. This diversified business model allows the bank to provide its individual and institutional customers with a broader range of services. Moreover, the business model also brings significant cross-selling opportunities that are not readily available to its competitors.

Investment banking operations have higher margins compared to other divisions

JPMorgan's investment banking division - and the Sales & Trading unit in particular - has historically had strong operating margins compared to other divisions in the firm. The bank's position as the largest player in the global FICC trading industry has also helped it achieve considerable economies of scale compared to competitors.

KEY TRENDS

Regulatory reforms expected to pressurize revenue growth going forward

Increased regulation of the financial industry is expected to reduce the top line for most financial institutions. In the past, decreased regulation led to greater risk-taking for many parts of the businesses, which drove earnings growth. Stricter regulation has affected the banking industry in several ways:

• Banks are now required to hold additional amounts of capital, which can potentially slow growth
• The CARD Act passed by Congress has clipped card income by prohibiting issuers from raising rates, fees, or finance charges on existing balances or prospective accounts in the first year
• The Volcker rule has forced banks to scale back trading operations
• Securitization has become less appealing, as investors and regulators demand that banks retain some risk as well

Strong capital position

JPMorgan has a strong liquidity and capital position across its businesses.

Improvements in efficiency

JPMorgan Chase has done well over recent years to reduce non-interest expenses as a percentage of its revenues from around 65% in 2011-15 to just 58-60% in 2016-22. The bank has also worked hard to cut overhead costs to improve its profit margins.

Acquisitions have helped grow the company's business lines

Past acquisitions, most notably those of Bear Stearns and Washington Mutual, have helped increase the investment banking and retail banking business for JPMorgan.

Leader in retail banking

JPMorgan competes with Bank of America and Wells Fargo, mostly in the retail banking business. It currently has more than 5,000 branches across the country.

Dominant position in investment banking

JPMorgan holds a strong position in the global investment banking space. According to Thomson Reuters, it earned the most global advisory, debt origination, and equity & equity-related underwriting fees for each of the last four years.

Consolidation expected to continue

As a result of the financial crisis, the banking industry saw a period of mergers and consolidation. The financial crisis has seen nearly 15-20% of the market share change hands. The banking industry continues to see consolidation in almost every business aspect as players try to globalize and seek scale. Due to uncertainty, customers are also increasingly becoming more risk-averse and turning to larger players with stronger deposit bases. The number of operating commercial banks was around 4,787 in 2022.