JPMorgan’s stock (NYSE: JPM) has lost 23% YTD, as compared to the 16% decline in the S&P500 over the same period. The recent decline was primarily due to high inflation numbers in the U.S., the fear of recession due to aggressive rate hikes by the Fed, and the Russia-Ukraine crisis. The above factors will likely hurt the consumer spending levels and are expected to increase the credit risk.
JPM stock is currently trading at $122 per share, which is 23% below its fair value of $158 – Trefis’ estimate for JPMorgan’s valuation. The bank posted mixed results in the first quarter, with revenues topping the consensus but earnings missing the expectations. It reported total revenues of $30.7 billion – 5% lower than the year-ago period. This could be attributed to a 2% drop in the consumer & community banking segment, followed by a 7% decrease in the corporate & investment banking division. Consumer & community banking saw a 15% decline in the noninterest revenue, mainly because of lower mortgage fees & related income and card income. However, the 5% growth in the net interest income (NII) was able to offset most of this impact. The corporate & investment banking segment primarily suffered due to lower investment banking revenues and a drop in equity trading income. Further, the bank increased its provisions for credit losses from -$1.89 billion to $1.46 billion in the quarter. It negatively impacted the profitability figures – adjusted net income decreased 43% y-o-y to $7.9 billion.
The bank’s revenues marginally increased to $121.7 billion in 2021. While the corporate & investment banking, commercial banking, and asset management segments reported growth, it was almost offset by lower revenues in the consumer & community banking and corporate divisions. All in all, the adjusted net income increased 70% y-o-y to $46.5 billion in 2021, primarily due to a favorable decrease in the provisions for credit losses from $17.5 billion to -$9.3 billion.
The Federal Reserve has begun to increase the benchmark interest rates to tackle the rising inflation numbers. Further, it has already increased the interest rates twice this year, which is anticipated to be followed by multiple rate hikes over the coming months. This move will likely benefit the net interest margin of the bank. That said, the outstanding loan balances are unlikely to see significant growth in 2022. Further, investment banking and sales & trading revenues are expected to normalize, with a recovery in the economy. Overall, JPMorgan’s revenues are forecast to remain around $124.9 billion in FY2022. Additionally, JPM’s adjusted net income margin is likely to stabilize close to 27%, leading to an adjusted net income of $33.9 billion and an annual EPS of $11.57. This coupled with a P/E multiple of just below 14x will lead to the valuation of $158.
|S&P 500 Return||-3%||-16%||79%|
|Trefis Multi-Strategy Portfolio||-5%||-21%||210%|
 Month-to-date and year-to-date as of 5/18/2022
 Cumulative total returns since the end of 2016