Leading US banks, including JPMorgan, successfully weathered the spring turmoil in the sector, withstood the Fed’s stress tests and showed generally good financial results in the second quarter. We believe that due to the high diversification and large scale of the business, strong capital positions, large players will continue to look financially confident in the current difficult economic conditions, and look forward to a gradual improvement in investor sentiment towards their shares. At the same time, JPMorgan shares, after a good growth in recent months, have approached their fair value, and their potential for further strengthening is limited.
We downgrade JPMorgan stock to Hold from Buy and reiterate our target price of $157.7, implying a 2.7% upside. Since our last recommendation from the beginning of this year, the bank’s share price has risen by 12.5%, and these shares, in our opinion, are already close to a fair valuation.
| JPM | Hold |
|---|---|
| Target price, $ | 157.7 |
| Current price, $ | 153.6 |
| Growth potential | 2.7% |
| ISIN | US46625H1005 |
| Number of shares, million | 2906.1 |
| Capitalization, billion $ | 446.3 |
| Assets, billion $ | 3368.2 |
JPMorgan Chase is one of the leading international financial holdings, the largest US bank in terms of assets. JPMorgan is one of the US leaders in terms of mortgage lending and credit card issuance, and is the world leader in the investment banking market.
JPMorgan’s financial results for the second quarter of 2023 turned out to be strong, which was facilitated, among other things, by the acquisition of part of the assets of the bankrupt First Republic Bank. Net income jumped 63.7% YoY to $14.5 billion, or $4.75 per share, on a 34.1% YoY increase in revenue to a record $42.4 billion, both markedly exceeded expectations. The Bank significantly increased its net interest income on the back of growth in lending volumes and interest rates. Meanwhile, some pressure on earnings came from a significant increase in credit risk costs due to worsening economic forecasts.
Financial indicators, billion $
| Index | 2022 | 2023P | 2024P |
|---|---|---|---|
| Revenue | 132.3 | 159.4 | 156.1 |
| Net profit | 37.7 | 47.1 | 42.6 |
| EPS, $ | 12.09 | 16.06 | 14.82 |
| DPS, $ | 4.00 | 4.10 | 4.20 |
In Q2, JPMorgan returned $4.7 billion to shareholders through dividends and buybacks. Earlier this year, the bank successfully passed the Fed’s stress tests, and management announced plans to raise its quarterly dividend by 5% to $1.05 per share.
Financial ratios
| Index | 2022 | 2023P | 2024P |
|---|---|---|---|
| ROE | 14.0% | 16.5% | 14.4% |
| LONG | 1.0% | 1.3% | 1.2% |
| C/I | 57.6% | 53.1% | 56.4% |
| CET1 | 13.2% | 14.1% | 14.7% |
We are cautiously optimistic about JPMorgan’s business outlook. Despite high inflation, tight Fed monetary policy, spring turmoil in the banking sector, significant geopolitical risks, the US economy shows good resilience this year thanks to a strong labor market and continued growth in consumer spending. Against this background, JPMorgan, like other leading US banks, we believe will continue to look relatively good financially, benefiting from the continued increase, albeit at a slower pace, in economic activity in the country.
Our valuation of JPMorgan shares is based on peer comparisons in terms of NTM P/E and dividend yield, as well as an analysis of the bank’s own historical multiples. It implies an upside of 2.7%.
Moody’s Recent Downgrading of Credit Ratings of Several Small US BanksAnd the prospect of a downgrade of the ratings of a number of larger creditors once again reminded of the risks inherent in the sector. They are associated with outstripping growth in deposit rates to prevent an outflow of customer funds or attract new money, which will put pressure on the net interest margin of banks, large accumulated “paper” losses on securities on the balance sheets of creditors, a difficult situation in the US commercial real estate sector, which accounts for a significant portion of loan portfolios. However, small regional banks are the most vulnerable to these risks. Leading players, including JPMorgan, look more resilient due to high diversification and large business scale, strong capital positions and should be very confident to get through the current difficult economic period.
