Jamie Dimon, CEO and chairman of JPMorgan Chase
Photo Illustration by Barron’s Staff; (Jamie Dimon) Mark Wilson/Getty Images; (reference) Dreamstime (1)
There is a little less swagger than usual at JPMorgan Chase these days, and that’s probably good news for investors.
Shares of the bank, the industry leader in market value and profits, are down 17% this year, to a recent $132, and have trailed those of most peers over the past 12 months. JPMorgan Chase (ticker: JPM) finds itself on the defensive after two consecutive quarterly earnings disappointments that have unsettled investors long used to viewing it as the safest and most dependable big bank.
The issues include elevated spending, lower-than-expected capital levels, and reduced stock buybacks this year. Investors also worry about the industry’s credit exposure if sharply higher short interest rates tip the economy into recession next year.
JPMorgan isn’t immune from economic trends, but it remains the class of the industry with a still-ample 16% return on tangible equity in the most recent quarter. And it has the industry’s best and deepest management team, led by longtime CEO Jamie Dimon. He is expected to stay on until 2026, when he will turn 70.
At $132, the stock trades for 12 times projected 2022 earnings of $11 a share and for 10.5 times estimated 2023 earnings of $12.57 a share. The yield is now 3%, and JPMorgan is expected to lift its dividend by about 10% at midyear after the next round of regulatory stress tests.
“JPMorgan is well positioned for the long term, and it trades at a discounted price,” says Jason Goldberg, banking analyst at Barclays, who has an overweight rating and a $200 price target on the stock. “It continues to take market share across its four major businesses.” Those are its corporate and investment bank, consumer bank, commercial bank, and asset and wealth management.
Coming into 2022, the upbeat JPMorgan story centered on increases in short rates that would fatten margins as the bank held the line on deposit rates and generated higher yields on loans and securities investments.
The narrative received a jolt in January, when the bank projected that noninterest expenses this year would be up 8%, to $77 billion—$4 billion above expectations—without providing much detail on those added expenses. That led to a stock drop and criticism from analysts. Mike Mayo of Wells Fargo wrote that JPMorgan was ramping up spending for “ill-defined back-ended benefits.”
The bank then scheduled an investor day for late May to address the issues being raised. The meeting could be a positive catalyst for the stock if JPMorgan then indicates that it can hit a standing goal of a 17% return on tangible equity this year, which is above the current Wall Street estimate.
“The competitive environment has shifted, and we don’t want to be complacent. We want to lean in and make investments,” says Jeremy Barnum, the bank’s chief financial officer. “We feel great about the operating environment, our overall market-share position, and the growth opportunities.” Among the new initiatives are a digital consumer bank in the United Kingdom that could roll out elsewhere in Europe.
Profits this year are expected to fall to about $11 a share from over $15 in 2021, despite higher core net interest income that could hit $56 billion, up from $44.5 billion in 2021. Why the decline? Blame elevated spending and no repeat of last year’s big release of loan-loss reserves that boosted earnings.
The bank’s first-quarter profits of $2.63 a share were a dime below expectations. Investors also weren’t thrilled that a key capital ratio declined to 11.9% from 13.1% in the prior quarter. That should limit share buybacks this year—and possibly into 2023—as the bank rebuilds the capital base.
Glenn Schorr, banking analyst at Evercore ISI, sees about $8.5 billion of net repurchases this year after employee stock issuance, down from $17 billion in 2021. It is frustrating to investors that buybacks are lower with the stock price down.
Part of the reason for the lower capital ratio is that higher rates have cut the value of the bank’s bond portfolio. The benefit is that JPMorgan will be earning higher yields on new securities purchases.
“It’s a timing issue,” Goldberg says. “JPMorgan will more than offset that with higher net interest income.”
King of Capital
How JPMorgan Chase stacks up to its big bank rivals.
| Bank / Ticker | Recent Price | Market Value (bil) | YTD Change | 2022E EPS | 2022E P/E | Dividend Yield | Price/TBV |
|---|---|---|---|---|---|---|---|
| JPMorgan Chase / JPM | $131.58 | $387 | -16.9% | $11.17 | 11.8 | 3.0% | 1.9 |
| Bank of America / BAC | 39.66 | 320 | -10.9 | 3.33 | 11.9 | 2.1 | 1.9 |
| Citigroup / C | 53.10 | 105 | -12.1 | 6.84 | 7.7 | 3.8 | 0.7 |
| Goldman Sachs Group / GS | 341.06 | 122 | -10.8 | 39.33 | 8.7 | 2.3 | 1.2 |
| Morgan Stanley / MS | 90.61 | 159 | -7.7 | 7.51 | 12.1 | 3.1 | 2.3 |
| Wells Fargo / WFC | 48.65 | 185 | 1.4 | 4.15 | 11.7 | 2.0 | 1.4 |
Note: TBV=tangible book value. Return on tangible equity for Q1 2022. E=estimate
Sources: Bloomberg; company reports
Dimon is the longest-serving CEO among the big banks, having taken the top job in 2005.
After the bank gave him 1.5 million options as a retention bonus last year that will vest in 2026, the thinking is that he will stay on as CEO until then. In a proxy in April, the bank indicated that Dimon would stick around as chairman afterward, noting that most big investors support that idea.
If Dimon, who is 66, steps down as CEO in the next year or two, his likely successor is the bank’s No. 2, Daniel Pinto, 59, the president and chief operating officer. But if Dimon waits until 2026, the favorite is likely to be Marianne Lake, 52, who made her mark as CFO from 2013 to 2019 and is now co-head of the consumer business.
Dimon likes keeping score, and JPMorgan stock is trailing the S&P 500 index over the past one, three, and five years. Dimon will want to turn around the performance gap for the benefit of investors.
Write to Andrew Bary at andrew.bary@barrons.com
Source: finance.yahoo.com