Despite facing several challenges over the past few months, there are signs of the stabilization of the banking industry as deposit outflows are slowing down. Deutsche Bank analysts said in a client note, “Our baseline does not anticipate a further intensification of banking stresses.”
Investors would be keenly watching how well banks grappled with the deposit outflows due to the bank failures in their soon-to-be-released results. America’s largest bank by assets, JPMorgan Chase & Co. (JPM), is set to release its second-quarter earnings later this week.
While the consensus earnings and revenue estimates indicate significant improvement year-over-year, in this piece, I have discussed several reasons why waiting for a better entry point in JPM could be prudent.
Investors will closely monitor JPM’s second-quarter financial performance as it will be the bank’s results for the first quarter since it acquired a substantial majority of assets and assumed certain liabilities of the failed First Republic Bank from the FDIC. As part of the deal, JPM took $92 billion in deposits from First Republic Bank’s total deposits of $103.90 billion.
The bank also assumed about $173 billion in loans and $30 billion in securities of First Republic. On the First Republic acquisition, JPM Chairman and CEO Jamie Dimon said, “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.”
According to Bloomberg Intelligence analysts, the acquisition would help JPM add between 1% and 2% to its net income. Goldman Sachs’ managing director Richard Ramsden, in a note on July 5, said, “JPM could surprise to the upside in terms of the revenue synergies from the deal.”
Wall Street expects JPM’s EPS in the second quarter to come in at $3.97, indicating a year-over-year improvement of 43.8%. The 20-analyst consensus EPS estimate moved 0.5% upward over the past seven days. The consensus revenue estimate of $38.97 billion indicates a year-over-year increase of 23.2%.
The bank expects its net interest income (NII) for fiscal 2023 to come in at $84 billion, $3 billion higher than the guidance given in April. The bank lifted its NII guidance following the acquisition of the First Republic Bank. It expects its expenses to be $84.5 billion, excluding the $3.5 billion cost to integrate First Republic Bank.
JPM’s stock has gained 36.2% in price over the past nine months and 25.8% over the past year to close the last trading session at $144.34.
Here’s what could influence JPM’s performance in the upcoming months:
Robust Financials
JPM’s total revenue for the first quarter ended March 31, 2023, increased 24.8% year-over-year to $38.35 billion. Its net interest income rose 49.3% year-over-year to $20.71 billion. The company’s noninterest revenue increased 4.7% year-over-year to $17.64 billion. Its net income increased 52.4% year-over-year to $12.62 billion. Also, its EPS came in at $4.10, representing an increase of 55.9% year-over-year.
Its return on common equity came in at 18%, compared to 13% in the year-ago quarter. Furthermore, its return on tangible common equity (ROTCE) came in at 23%, compared to 16% in the prior-year quarter.
Mixed Analyst Estimates
Analysts expect JPM’s EPS and revenue for fiscal 2023 to increase 20.1% and 17.9% year-over-year to $14.52 and $151.70 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to decline 3.4% and 1.4% year-over-year to $14.03 and $149.58 billion, respectively.
High Profitability
In terms of the trailing-12-month net income margin, JPM’s 32.54% is 25.5% higher than the 25.93% industry average. Likewise, its 15.22% trailing-12-month Return on Common Equity is 37.1% higher than the industry average of 11.10%.
Stretched Valuation
In terms of forward Price/Sales, JPM’s 2.78x is 27% higher than the 2.19x industry average. Its 1.43x forward Price/Book is 50.3% higher than the 0.95x industry average. Likewise, its 9.94x forward non-GAAP P/E is 12.9% higher than the 8.80x industry average.
POWR Ratings Reflect Uncertainty
JPM has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JPM has a D grade for Value, consistent with its stretched valuation. Its 1.08 beta justifies its C grade for Stability.
JPM is ranked #4 out of 10 stocks in the Money Center Banks industry. Click here to access JPM’s Growth, Momentum, Sentiment, and Quality ratings.
Bottom Line
The banking crisis following the collapse of the three regional banks might have kept banks’ profit margins under pressure in the second quarter. The synergies from the acquisition of First Republic Bank are expected to boost JPM’s revenues.
JPM raised its net interest income estimates for fiscal 2023 following the acquisition of the First Republic. However, the bank has cautioned that “sources of uncertainty” around deposits and the economy could impact its forecast.
Given its mixed profitability and analyst estimates, it could be wise to wait for a better entry point in the stock.
How Does JPMorgan Chase & Co. (JPM) Stack Up Against Its Peers?
JPM has an overall POWR Rating of C, equating to a Neutral rating. Check out these stocks from the Foreign Banks industry with an A (Strong Buy) or B (Buy) rating: Banco BBVA Argentina S.A. (BBAR), Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), and KB Financial Group Inc. (KB).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
JPM shares rose $0.48 (+0.33%) in premarket trading Monday. Year-to-date, JPM has gained 10.50%, versus a 15.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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