Has JPMorgan’s Stock Exhausted Its Growth Potential?

JPMorgan’s (NYSE: JPM) stock rallied more than 44% in 2019, with the bank’s share price averaging just above $116 for the year. We believe that the banking giant’s stock has exhausted its growth potential and is reasonably priced. Trefis details the key components of JPMorgan’s valuation in an interactive dashboard, along with our forecast for full-year 2020, and estimates the fair value of JPMorgan’s stock to be $138 per share. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q4 2019 Earnings Recap and FY 2020 Guidance

• JPMorgan surpassed consensus estimates for both earnings and revenues from its Q4 2019 results
• In Q4 2019, it reported Total Revenues of $28.3 billion, up 9% y-o-y. This could be attributed to a 31% y-o-y jump in Corporate & Investment Banking, followed by a 3% increase in Consumer Banking revenues, partially offset by a 3% y-o-y decrease in Commercial Banking revenues.
• Notably, the growth in the Corporate & Investment Banking segment was driven by an 86% y-o-y increase in revenues from fixed income markets (Fixed Income, Currency, and Commodity trading).
• Overall, the banking giant reported strong Consumer Banking revenues in 2019, which was the highest contributing segment in the previous year. This was mainly driven by growth in card transaction fees and service charges on deposits followed by a slight increase in net interest income on consumer banking loans.
• Going forward, we expect consumer banking and investment banking business to drive revenues in the subsequent year, although and the adverse economic scenario could hamper its growth.

We arrive at the stock price estimate for JPMorgan as:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

Consumer Banking Will Drive Growth In JPMorgan’s Revenues For Full Year 2020

• Total Revenues have increased by 21% from $95.7 billion in 2016 to $115.6 billion in 2019 and is expected to increase by 2% to $118.1 Billion in 2020.
• Although Corporate and Investment Banking revenues have increased by 9% over the last four years, it is expected to drop slightly in 2020 due to a 4% decline in Treasury & Security Services.
• On the other hand, Consumer Banking is expected to maintain its growth momentum, helping revenues reach $57.4 billion in 2020. This would be driven by growth in card income and higher service charges.
• Notably, Consumer Banking is the highest contributing segment of the bank, with a revenue share of more than 47% in recent years.
• While the Commercial Banking revenues have grown 21% over the last four years, it is expected to report marginal growth in 2020 due to lower net interest margin on commercial loans.
• Further, Asset & Wealth Management business, which has increased by 19% over 2016-2019, would report a 2% decline in revenues for 2020, mainly driven by lower fees as % of total client assets and a drop in net interest margin on segment loans.

Our interactive dashboard – ‘JPMorgan Revenues: How Does JPMorgan Make Money?’, captures the factors that have driven changes in revenues of JPMorgan’s segments over recent years along with our forecast for the next two years.

However, Higher Expenses Would Reduce The Net Income Figure

• JPMorgan is expected to report a Net Income of $33.6 billion in 2020, which is 3% less than the previous year.
• The operating margin is expected to decrease by 58 bps in 2020 as compared to the previous year, due to higher growth in expenses.
• This, coupled with a higher expected tax rate, would reduce the adjusted net income margin by 150 bps from 30% in 2019 to 28.5% by 2020.

This Lends Support To A $138 Price Estimate For JPMorgan’s Shares

• JPMorgan has regularly invested in share repurchase to boost shareholder returns. Its share repurchase program is likely to touch $19.3 billion for the full year 2020.
• Lower outstanding shares should result in JPMorgan’s EPS figure increasing to $10.89 in 2020, despite a drop in adjusted net income.
• Using a 12.7x P/E Multiple on expected 2020 EPS of $10.89, this works out to our price estimate of $138 for JPMorgan’s Stock.

Our interactive dashboard – ‘JPMorgan Valuation: Expensive or Cheap?’, provides details about how JPMorgan’s P/E multiple compares with peers Citigroup, Bank of America, and Goldman Sachs.

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