[Updated 07/02/2021] JPMorgan Update
JPMorgan stock (NYSE: JPM) gained roughly 24% YTD, and at its current price of $157 per share, it is trading 4% below its fair value of $163 – Trefis’ estimate for JPMorgan’s valuation. The bank announced on 28 June that it has completed the Federal Reserve’s 2021 Comprehensive Capital Analysis and Review (“CCAR”) stress test process, which is conducted every year to assess, regulate, and supervise large banks and financial institutions. Notably, the Fed imposed some restrictions on dividends and share buybacks by the large banks last year, due to the economic slowdown. However, all the banks which are part of the annual stress test exercise 2021 were able to successfully clear it. Hence, JPMorgan expects to increase the quarterly common stock dividend to $1.00 per share (up from the current $0.90 per share) for the third quarter of 2021 (subject to approval by the Board of Directors). Further, JPM announced a $30 billion share repurchase plan in December 2020, valid for an indefinite timeframe.
The full-year 2020 revenues of $119.5 billion were slightly higher than the 2019 figure. This was driven by a significant jump in the corporate & investment bank segment due to higher investment banking and sales & trading revenues, partially offset by lower revenues in the consumer & community banking segment. The segment suffered due to a 10% y-o-y decrease in the net interest income (NII) driven by a lower interest rate environment and a decline in outstanding loans. Further, the same trend continued in the first quarter of FY2021 as well, with the bank posting a 46% y-o-y rise in corporate & investment bank revenues and a 6% drop in the community and consumer banking segment. Additionally, the bank’s non-interest income from core banking operations saw some improvement in the first quarter and we expect it to continue over the coming months. That said, growth in the corporate & investment bank is expected to normalize in the subsequent quarters with recovery in the economy. Further, the low-interest rates will likely stay below the pre-Covid-19 levels for some more time. Overall, this will restrict JPMorgan Revenues to $119.5 billion for FY2021. While the revenues are expected to remain stagnant in 2021, the bank’s profitability figures are likely to receive a big boost in the year due to a favorable decrease in provisions for credit losses. We expect the bank’s EPS figure to increase from $8.88 to $10.95 in the year, which coupled with the P/E multiple of close to 15x will lead to a valuation of roughly $163.
[Updated 05/12/2021] At $159, JPMorgan Stock Has A Limited Upside
JPMorgan stock (NYSE: JPM), the largest bank in the U.S. in terms of total assets, gained roughly 25% – increasing from about $127 at the beginning of 2021 to around $159 currently, outperforming the S&P500, which grew 11% over the same period.
There were three clear reasons for this: First, the approval of the $1.9 trillion stimulus check plan. Second, an accelerated Covid-19 vaccination drive in the U.S – 46.2% of the total U.S population has now received at least one dose. Third, the Fed has decided to maintain its benchmark rate near zero, which is expected to continue for a couple of years.
But is this all there is to the story?
Not quite, despite the recent gains, Trefis estimates JPMorgan’s valuation to be around $163 per share – slightly above the current market price – based on one key opportunity and one risk factor.
The opportunity we see is an improved trajectory for JPMorgan Revenue over the subsequent quarters. JPMorgan reported full-year 2020 revenues of $119.5 billion – 4% higher than the 2019 figure, mainly due to a 26% growth in the corporate & investment bank segment, partially offset by a 7% y-o-y drop in the consumer & community banking unit. The growth in corporate & investment bank was driven by a 39% jump in sales & trading and a 25% rise in investment banking revenues, due to the impact of the higher trading volumes and underwriting deals, respectively. Further, the consumer & community banking segment suffered in the year due to a 10% decline in the net interest income (NII) driven by the lower interest rate environment and a decrease in outstanding loans, followed by a drop in card purchase volumes due to lower consumer spending levels. Notably, the segment contributed roughly 43% of the total revenues in 2020 – down from 48% in 2019.
The same momentum continued in the first-quarter FY2021 as well, with JPM reporting 14% y-o-y growth in revenues to $32.3 billion. It posted a 46% rise in corporate & investment bank revenues driven by growth in investment banking (mainly equity underwriting) and sales & trading businesses. Further, on the same lines as 2020, the community and consumer banking revenues suffered a 6% y-o-y drop in the quarter. It was primarily due to a 14% decline in NII, partially offset by a 12% growth in non-interest income. The recovery in non-interest income was due to growth in average deposits, client investment assets, and card purchase volume, which is likely to continue in the subsequent quarters. Notably, the bank has seen continuous growth in Assets under Management (AuM) over the recent quarters, which touched $2.8 trillion in Q1 – up 4% sequentially, benefiting its asset & wealth management segment. That said, growth in corporate & investment bank is tied to higher trading volumes and underwriting deal volumes, which are expected to normalize in the coming months. But, till then, the segment will likely drive its quarterly results. Further, the low-interest rates are likely to continue for some more time, pressuring NII. However, the recovery in consumer demand and continuous growth in AuM will benefit JPM’s top-line. Overall, we expect JPM’s revenues to remain around $119.5 billion for FY2021.
JPM’s net income margin is likely to improve in FY2021 from 22.9% to 27.3% due to the positive effect of lower provision for credit losses. Markedly, the bank released the loan loss reserve of $5.2 billion in the first quarter, resulting in a net provision figure of -$4.2 billion. Altogether, it is likely to result in an EPS of $10.95 for the year, which coupled with the P/E multiple of just above 15x will lead to a valuation of around $163.
Finally, how much should the market pay per dollar of JPMorgan earnings? Well, to earn close to $10.95 per year from a bank, you’d have to deposit about $1095 in a savings account today, so about 100x the desired earnings. At JPMorgan’s current share price of roughly $159, we are talking about a P/E multiple of just above 14x. And we think a figure closer to 15x will be appropriate.
That said, banking is a risky business right now. Growth looks less promising in core banking, and near-term prospects are less than rosy. What’s behind that?
Although the bank has reduced its provisions for loan losses over the recent quarters, signaling some improvement in the loan repayment capability of its customers, the repayment capability is directly linked to the health of the economy. If the economic conditions deteriorate, the bank is likely to face significant loan defaults – JPMorgan has a loan portfolio of around $434 billion in consumer & community banking and $207 billion in commercial banking ( as per Q1 FY2021 figures). Additionally, the low-interest-rate environment will likely hurt the NII of the bank. To sum things up, we believe that JPMorgan stock is slightly undervalued and offers limited upside.
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