Market sniffs JPMorgan’s growing dominance but there’s still value here (JPM)

C. B. Morgan Chase (New York Stock Exchange: JPM) was recently presented at a Goldman Sachs conference. There were two important points from the conference. First, net interest income is expected to be a positive catalyst for the bank with First Republic’s transaction performance Better than the model. Second, its focus on expanding its asset management business will continue to yield rewards and profitability for years to come. At current levels, JPM shares represent an attractive risk reward for long-term focused investors.

Over the past decade, JPMorgan Chase has demonstrated remarkable strength in expanding market share across key business segments, while simultaneously honing its operations to deliver consistent profits. JPMorgan’s growth has been the cornerstone of the “castle-like balance sheet” as defined by Jamie Dimon. JP Morgan’s continued focus on enhancing operational efficiency has been a cornerstone of the JP Morgan success story. By streamlining operations, optimizing resources, and taking advantage of technological advances, the bank has positioned itself to operate More effectively and achieve consistent profits.

The First Republic acquisition performed better than expected

JPM’s recent acquisition of First Republic is expected to help provide a favorable boost to its business model. After completing the acquisition of First Republic in May 2023, JPMorgan saw a 20% increase in deposits and was able to maintain relationships with 90% of its clients, exceeding its expected performance. This success story from the deal contributes significantly to why JPMorgan’s forecast for net interest income (NII) for 2023 is so optimistic. They emphasized that although NII may see a gradual decline in the medium term, the outlook remains positive.

Furthermore, in 2023, JPMorgan is set to add 2 million new checking accounts. It is worth noting that about a third of the gains in deposit shares were due to new branches established over the past decade.

The consumer is still strong

JPMorgan highlighted the positive momentum behind the expansion of credit card loans, which could positively impact net interest income (NII). However, this growth will require higher reserves for these new loans – a factor they stressed is underestimated in the consensus models. Conversely, they expected a more conservative performance on the wholesale side.

Overall, consumer welfare appears strong. JPMorgan did not observe any unexpected weaknesses in certain sectors, and consumer credit normalization is slightly more positive than initially expected. While credit card trends have stabilized (expect about 2.5% for FY2023), residential lending continues to reap benefits from write-downs stemming from the global financial crisis. However, the automotive sector is showing signs of stress, as indicated by an increase in payment delinquencies. Despite this, the supply chain’s ability to support prices suggests relatively limited losses in the event of a default. JP Morgan has adopted more stringent measures, especially with regard to car loans with high loan-to-value ratios, even for borrowers with high credit scores.

Asset management is poised for continued growth

Although Asset and Wealth Management (AWM) makes up a relatively modest portion, representing about 13% of revenues and 12% of profits within JPMorgan, its importance goes beyond these numbers. It plays a pivotal role in supporting JPMorgan’s overall operations and various other business segments. Furthermore, AWM stands out as one of the most profitable sectors within JPMorgan, boasting a 32% year-to-date return on equity, exceeding management’s target of +25%. Its consistent performance is evident, with an average ROE of 30% since 2020 compared to a total ROE of 18% for JPMorgan.

The above investments in technology made by JPM are also helping JPM’s AWM division. Management believes that technology investments throughout the organization will continue to provide a competitive advantage over its peers. Although the majority of investments are smaller in size, JPMorgan is actively exploring several deals and remains receptive to complementing its organic growth through potential mergers and acquisitions (M&A).

During the Investor Day, management highlighted the long-term goals (3-5 years) set for the Asset and Wealth Management (AWM) division from 2020:

• Asset flows under management grew by 4%, compared to 2% in 2022
• 5% revenue growth
• The target profit margin before tax exceeds 25%, and the margin to date is 38%.
• Striving to achieve a return on equity target higher than 25%, currently 32% year-to-date

Valuations are still reasonable

Against the backdrop of a strong business growing better than expected, JPM shares continue to trade at reasonable levels.

JPM’s price-to-book ratio has averaged about 1.56 times over the past six years. It’s currently around 1.7x, which is a little above average, but a long way from the top book price of 2x.

As for its price-to-earnings ratio, JP Morgan looks like a bargain.

It is currently trading at 10x P/E, which is well below the average 6-year P/E of 11.7x.

It’s also worth noting that JPM has tripled its dividend over the past five years. The current dividend yield is 2.5%. It is reasonable to expect this return to grow as the bank’s already huge business grows in the coming years.

As with most banks, the most important risks facing JPM are credit risk, market risk and reputational risk. Credit risk increases occur when borrowers default on their loans, affecting a bank’s assets and profitability. Volatility in financial markets can affect a bank’s book value, creating market risk. For JPMorgan, the potential for a significant loss from the above is somewhat mitigated by its well-capitalized balance sheet. Perhaps the most important risk that JPMorgan faces is reputational risk. If this occurs, continued negative publicity, scandal, or unethical practices could erode consumer confidence in JPMorgan and harm the bank’s reputation and investor confidence.

In conclusion

Over the past decade, JPMorgan Chase has demonstrated remarkable ingenuity in expanding market share across key business segments, while at the same time adjusting its operations to generate consistent profits. This created a strong balance sheet, which its CEO called “The Castle.” Continued market share increases and enhanced operational efficiencies are expected to drive JP Morgan’s momentum further, maintaining its stock’s upward trajectory.