The failures of three banks earlier this year triggered panic across the country. Despite assurances by the Federal regulators and top executives of large financial institutions, depositors and investors remain jittery about the banking system's stability.
Concerns over the banking crisis led depositors to pull out their money and park it in high-interest paying money market funds or large banks like JPMorgan Chase & Co. (JPM). The company saw its deposits rise 2% year-over-year to $2.38 trillion in the first quarter. JPM was one of the few banks which saw its deposits rise.
In this piece, I have discussed several reasons why waiting for a better entry point in JPM could be prudent despite its increased deposits and acquisition of First Republic Bank.
Since last year, the Federal Reserve’s aggressive interest rate hikes to bring inflation down have lowered the value of banks’ assets, such as loans or bonds. Similarly, in a bid to retain customers, the deposit costs for banks are rising higher to stop them from seeking higher yields elsewhere. According to the Federal Deposit Insurance Corporation (FDIC), U.S. banks lost $472 billion in deposits during the first quarter.
Depositors withdraw their deposits and put them into large banks and higher-yielding money market funds. For the week ended June 14, 2023, total money market fund assets came in at $5.45 trillion. Deutsche Bank analysts said in a client note, “Our baseline does not anticipate a further intensification of banking stresses.”
During the first quarter, JPM surpassed the consensus EPS and revenue estimates. Its EPS beat analyst estimates by 21.7%, while its revenue was 7.3% higher than the consensus estimate. JPM’s Chairman and CEO Jamie Dimon said, “We continued to generate considerable amounts of capital, and our CET1 ratio increased to 13.8%, compared to a regulatory requirement of 12.5% and our target of 13% for the first quarter.”
Despite the influx of deposits, JPM warned investors that deposit outflows could occur later. JPM’s CFO Jeremy Barnum said, “It’s a competitive market, and it’s entirely possible that people temporarily come to us, and then over time, decide to go elsewhere.”
Earlier this month, JPM announced that it acquired a substantial majority of assets and assumed certain liabilities of the failed First Republic Bank from the FDIC. The failure of the First Republic Bank was the second-largest in United States history. As part of the deal, JPM took $92 billion in deposits from First Republic Bank’s total deposits of $103.90 billion.
The bank also assumed about $173 billion in loans and $30 billion in securities of First Republic. According to Bloomberg Intelligence analysts, the acquisition will help JPM add between 1% and 2% to its net income.
On the First Republic acquisition, JPM Chairman and CEO Jamie Dimon said, “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”
The bank expects its net interest income (NII) for fiscal 2023 to come in at $84 billion, $3 billion higher than the guidance given in April. The bank lifted its NII guidance due to the acquisition of the First Republic Bank. It expects its expenses to be $84.5 billion, excluding the $3.5 billion cost to integrate First Republic Bank.
JPM’s shares have gained 22.4% in price over the past nine months and 26.3% over the past year to close the last trading session at $143.26.
Here’s what could influence JPM’s performance in the upcoming months:
Robust Financials
JPM’s total revenue for the first quarter ended March 31, 2023, increased 24.8% year-over-year to $38.35 billion. Its net interest income rose 49.3% year-over-year to $20.71 billion. The company’s noninterest revenue increased 4.7% year-over-year to $17.64 billion. Its net income increased 52.4% year-over-year to $12.62 billion. Also, its EPS came in at $4.10, representing an increase of 55.9% year-over-year.
Its return on common equity came in at 18%, compared to 13% in the year-ago quarter. Furthermore, its return on tangible common equity (ROTCE) came in at 23%, compared to 16% in the prior-year quarter.
Mixed Analyst Estimates
Analysts expect JPM’s EPS and revenue for fiscal 2023 to increase 19.5% and 18% year-over-year to $14.45 and $151.91 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to decline 3.8% and 1.6% year-over-year to $13.90 and $149.46 billion, respectively.
Its EPS and revenue for the quarter ending June 30, 2023, are expected to increase 35.9% and 26.8% year-over-year, $3.75 and $38.95 billion, respectively.
Mixed Profitability
In terms of the trailing-12-month net income margin, JPM’s 32.54% is 25.5% higher than the 25.93% industry average. Likewise, its 15.22% trailing-12-month Return on Common Equity is 37.1% higher than the industry average of 11.10%. On the other hand, its 1.12% trailing-12-month Return on Total Assets is marginally lower than the 1.12% industry average.
Stretched Valuation
In terms of forward Price/Sales, JPM’s 2.76x is 22.5% higher than the 2.25x industry average. Its 1.41x forward Price/Book is 44.2% higher than the 0.98x industry average. Likewise, its 9.91x forward non-GAAP P/E is 9.7% higher than the 9.04x industry average.
POWR Ratings Reflect Uncertainty
JPM has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JPM has a D grade for Value, consistent with its stretched valuation.
It has a C grade for Quality, in sync with its mixed profitability. Its 1.09 beta justifies its C grade for Stability.
JPM is ranked #4 out of 9 stocks in the Money Center Banks industry. Click here to access JPM’s Growth, Momentum, and Sentiment ratings.
Bottom Line
JPM reported strong financials during the first quarter, with impressive revenue and net interest income growth. Moreover, it was one of the few banks that witnessed a rise in deposits. The bank reached the CET1 ratio target of 13% earlier than expected and plans to repurchase shares worth $12 billion this year. Additionally, the acquisition of First Republic Bank will boost its earnings.
However, the bank expects the second quarter and the rest of the year to be challenging as its performance is sensitive to market conditions and economic outlook. Despite raising its net interest income estimates for fiscal 2023 last month, the bank said that “sources of uncertainty” around deposits and the economy could impact its forecast.
Given its mixed profitability and mixed analyst estimates, it could be wise to wait for a better entry point in the stock.
How Does JPMorgan Chase & Co. (JPM) Stack Up Against Its Peers?
JPM has an overall POWR Rating of C, equating to a Neutral rating. Check out these stocks from the Foreign Banks industry with a B (Buy) rating: Banco BBVA Argentina S.A. (BBAR), KB Financial Group Inc. (KB), and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA).
What To Do Next?
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JPM shares were trading at $143.26 per share on Monday morning, up $0.17 (+0.12%). Year-to-date, JPM has gained 8.46%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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