Piece written by Nkosilathi Dube, Trive Financial Market Analyst 

JPMorgan Chase & Co  (ISIN: US46625H1005), the biggest bank in America, surpassed Wall Street earnings estimates resoundingly, setting a record quarterly profit, despite the company’s cautioning of potential risks looming.  

JPMorgan shattered earnings forecasts by 20.65% after landing on $4.75 per share, while revenues took to the upside by 6.96% to $41.31B. The company reported its best quarter on the bottom line as it enjoyed a year of steep interest rates, which filtered through its financial statements to produce a record high Net Interest Income (NII).  

After acquiring the majority of assets and certain liabilities of First Republic Bank on 1 May 2023, following the Banking Sector crisis, JPMorgan solidified its position as the leading bank in the world by assets. The bank’s expansion contributed to favourable earnings results and will likely continue to in the medium to long term, given that the fundamental picture supports its further development. Will JPMorgan’s share price ever see its peak again? 

Technical 

After taking a knock from the banking sector crisis, which saw its share price plunge 14.53% in three weeks, the share price has since recovered, helped by the company’s positive earnings and expansion. Support was established from the low formed amid the banking sector crisis at the $123.11 per share level, while resistance at $159.03 per share was formed in February 2022, as the selloff from the peak of October 2021 continued.  

After crossing over the 100-day moving average, JPMorgan’s share price entered an uptrend with declining momentum, represented by the tapering off of volumes. A rising wedge pattern subsequently formed, and as it is considered a bearish pattern, there could be a possibility that the share price will take a plunge. A high volume breakdown to the pattern’s downside could expose the share price to downside pressures. Optimistic investors could look to the $123.11 per share support level as a point of interest to partake in upside price action if downside volumes begin to dissipate when the price approaches the level.  

In contrast, a high volume breakout to the upside could signal that the market is still optimistic about the stock. If upside momentum supports the move, the share price could come in contact with its premium or resistance level at the $159.03 per share level. 

Fundamental  

The biggest U.S. lender’s earnings increased due to higher interest income from borrowers and the positive effects of the First Republic Bank acquisition. Due to JPMorgan taking advantage of higher rates and strong loan growth, revenue increased 34% to $42.4B. The bank’s net interest income, increased by 44% to $21.90B, or by 38% when First Republic is excluded. 

The quarter’s revenue from investment banking increased 11% to $1.5B. The fixed-income and equity trading segments suffered losses, resulting in a 10% decline in revenue. The segments did better than the bank anticipated when it predicted a 15% fall in revenue for investment banking and trading in May. The best performer was the retail baking division which saw revenues surge 37%, resulting in a $5.3B profit, up 71% year-on-year.  

For the three months that ended on 30 June 2023, JPMorgan’s profit increased 67% to $14.4B or $4.75 per share. After one-time costs, the bank earned $4.37 per share, handily exceeding analysts’ average forecast of $4.00 per share. In order to prepare for potentially troubled loans, the bank has set up a $2.9B provision for credit losses, more than triple what it did last year. 

JPMorgan expanded its business this year by acquiring First Republic Bank, which significantly bolstered its asset base. The bank bought $203B worth of assets from First Republic Bank, including around $173B in loans and about $30B in securities. It also assumed $92B in deposits, including $30B in significant bank deposits, which will be paid back after the closing or eliminated after consolidation. JPMorgan took up no corporate debt of First Republic Bank. Without accounting for the estimated $2.6B one-time post-tax gain or the estimated $2.0B in post-tax restructuring costs anticipated over the course of 2023 and 2024, the transaction is expected to modestly grow earnings per share and generate more than $500M of additional net income annually. 

JPMorgan boosted its guidance for net interest income for 2023 by $3B to $87B. This marks the third rise to the bank’s NII forecast this year. 

However, the bank cautioned against the headwinds of economic risks to come, particularly in the commercial real estate division. The bank announced on Friday that it had increased its reserves to cover anticipated losses from commercial real estate loans, the latest indication that the industry is under increasing pressure. Revenue from commercial real estate at JPMorgan increased from $642M in the first quarter to $806M in the second quarter. Nevertheless, despite the segment’s income improving, the bank recorded $1.1 billion in credit loss provisions, driven by its office portfolio. 

Source: Trive Financial Services Malta – JPMorgan, Nkosilathi Dube 

After breezing past the U.S. Bank Stress Tests, JPMorgan is among the most well-capitalized banks within the U.S. banking sector. It offers a relatively high level of defense to risk events, as it has sufficient liquid assets to absorb losses, with a Core Tier 1 capital ratio of 13.8×. In the third quarter, JPMorgan plans to increase its dividend payout to $1.05 from $1 per share, pending board approval. 

Source: Trive Financial Services Malta – JPMorgan, Nkosilathi Dube 

Despite having a solid cushion for risk events, JPMorgan runs its business moderately, compared to its peers, with a 53.21% Net Loans to Deposits ratio. This falls within the lowest Net loans to deposits ratio among the top U.S. banks. Investors looking to take on more risk but with a somewhat defensive attribute could look to JPMorgan stocks as it uses its asset base effectively and moderately to produce an income.  

Source: Trive Financial Services Malta – TradingView, Nkosilathi Dube 

JPMorgan’s share price positively correlates to the broader market represented by the S&P500 (SPX) as they move in tandem. On a year-to-date basis, the SPX has outperformed JPMorgan by just over 5%, primarily due to the steep selloff that the bank endured in early March.  

After discounting for future cash flows, a fair value of $165.00 per share was derived.  

Summary 

With U.S. interest rates still at their highest in nearly 16 years, the banking sector will likely continue to see hefty net income interest flow towards the top lines. Given that rates do not taper off in the near term, JPMorgan’s share price could converge with its $165.00 per share fair value as its earnings continue to be supported by higher net interest income.  

Sources: JPMorgan Chase & Co, Reuters, CNBC, S&P Global, TradingView, Koyfin