Despite Rate Cuts, JPMorgan Still Has a 13% Upside

We believe that JPMorgan’s stock (NYSE: JPM) has a 13% upside potential in the near-term, once the loan repayment capability of its customers sees some improvement. JPM trades near $122 currently and has lost 13% in value so far this year. It traded at a pre-Covid high of $137 in February, and it is 12% below that level now. Also, JPM stock has gained 54% from the low of $79 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets (S&P 500 is up about 65% since March lows), as investors are cautious about the impact of lower interest rates and higher loan default risk on the Bank’s top line – the bank’s consolidated earnings for the last 2 quarters decreased 22%, mainly due to a significant build-up in provisions for credit losses.

JPMorgan is one of the top five investment banks in the U.S. The bank managed to outperform the consensus estimates in its recently released Q3 results, same as in the second quarter – its top line has increased 7% to a consolidated figure of $62.1 billion for the last 2 quarters from $58.2 billion a year ago. While this growth was fueled by higher revenues in Sales & Trading and investment banking segments, the core banking revenues suffered due to lower interest rates. Further, we expect the low-interest environment to prevail for the next 1-1.5 years. The company has a sizable loan portfolio, and the current economic slowdown has affected the loan repayment capacity of its customers. It has increased its provisions for credit losses to cater to that risk – from $4.2 billion at the end of September 2019 to $19.4 billion at the end of September 2020. However, the loan repayment capacity of the customers is tied to the economic slowdown. As the economy moves toward normalcy, the financial health of its customers is likely to recover, reducing the risk of loan defaults. Further, the bank is likely to re-start its share repurchase plan in the first quarter of 2021. In view of the strong rally in JPM stock since late March, we believe that the stock has some room for growth in the near future. Our conclusion is based on our detailed analysis of JPMorgan’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 65% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how JPM and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

JPMorgan vs S&P 500 Performance Over 2007-08 Financial Crisis

JPM stock declined from levels of around $47 in October 2007 (the pre-crisis peak) to roughly $23 in March 2009 (as the markets bottomed out), implying that the stock lost around 51% of its value from its approximate pre-crisis peak. This marked a similar drop as the broader S&P, which fell by about 51%.

However, JPM recovered strongly post the 2008 crisis to about $42 in early 2010 – rising by 82% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

JPMorgan’s Fundamentals in Recent Years Look Strong

JPMorgan revenues grew by 24% from $93.5 billion in 2015 to $115.6 billion in 2019, primarily led by growth in the consumer banking segment. Similarly, the company’s adjusted net income improved from $22.4 billion to $34.6 billion over the same period, resulting in an improvement in the company’s net income margin from 24% to 30%. The company’s Q3 2020 revenues were marginally below the year-ago period and its EPS figure increased from $2.69 to $2.93.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to $137 (13% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $137 level JPM stock was at before the coronavirus outbreak gained global momentum.

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