JPMorgan Gives the Reassurance Investors Needed

JPMorgan JPM 6.89%

Chase told the market what they needed to hear.

After holding steady with its net interest income forecast when it announced first-quarter earnings last month, even as the Federal Reserve turned increasingly hawkish, the bank during its Investor Day presentation on Monday increased that target to $56 billion plus for 2022, excluding its volatile market unit. It also sees a path, based on what it predicts for Q4, to a future annual rate of around $66 billion.

That will only likely reassure investors that lenders won’t miss the rate hike, with worries about loan growth and deposit competition not denting gains. that core position.

Bank shares overall rallied on Monday, with JPMorgan stock on track for its best day since 2020 with a 7% gain. The KBW Nasdaq Bank index is up nearly 5%, nearly triple the rally in the broader S&P 500 index.

However, investors should not yet outgrow themselves. Even with these interest income expectations, JPMorgan has not changed its medium-term target of a 17% return on tangible equity, a key measure of a bank’s profitability.

CEO Jamie Dimon says there’s a very good chance the bank will hit that 17 per cent this year and it could hit that level next year in a healthy environment. According to FactSet, the bank’s physical book-price multiple is now just over 1.8 times. It was traded more than twice during the pandemic, and hit 2.5 times last year.

That means the stock’s price decline depends on a broader view of profitability, which takes into account a number of macro factors beyond the bank’s control. First, Mr Dimon noted that the bank is currently “taking in too much” on credit, losing about $3 billion a year on offsetting, or about half what he said might be normal. The bank expects this to eventually normalize, although they do not predict a quick reversal. It said it could take until near the end of next year to achieve the pre-pandemic net fee reduction. However, under current accounting rules, banks may have to adjust their loan provisions sooner, partly based on worst-case macroeconomic scenarios.

Thereafter, regulatory capital requirements increase, affecting the denominator portion of return on equity. The bank said it expected to administer a higher minimum capital ratio target from early 2024. Although it could get there through earnings growth – and so it won’t. must raise capital and dilute shareholders – this can limit the cash available for share buybacks that typically increase book value per share. It is a factor in the book value multiple.

The bank also spent considerable time on Monday explaining the return on investment in areas such as cloud computing and travel services. But in this scary market, investors may not be in any mood to pay for the potential. Such a cautious, spending-conscious mindset may have led to the largely symbolic, non-binding rejection of the bank’s compensation plan for Mr Dimon and executives. other top in a shareholder vote last week.

So after Monday, investors can rest easy. But don’t expect them to get excited.

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