JPMorgan Gives the Reassurance Investors Needed

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Bank’s stock jumps after it boosted forecast for net interest income, but further gains might be tougher to come by

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That alone will likely reassure investors that lenders aren’t going to miss out on the upside of rising rates, with worries about the pace of loan growth and deposit competition not erasing that core advantage.

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Bank stocks generally were surging on Monday, with JPMorgan shares on track for their best day since 2020 with a 7% gain. The KBW Nasdaq Bank index was up nearly 5%, almost triple the rebound in the broader S&P 500.

Still, investors shouldn’t get too far ahead of themselves yet. Even with this interest income expectation, JPMorgan didn’t alter its medium-term target for 17% return on tangible common equity, a key measure of bank profitability.

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Chief Executive Jamie Dimon said that there was a very good chance that the bank will achieve that 17% level this year, and it could hit that level next year in a benign environment. The bank’s price-to-tangible book multiple is now just over 1.8 times, according to FactSet. It was trading at more than two times heading into the pandemic, and reached 2.5 times last year.

Whether that means the stock is discounted depends on a broader perspective on returns, taking into account some macro factors partly out of the bank’s control. For one, Mr. Dimon noted that the bank is “over-earning” on credit right now, losing around $3 billion annually on charge-offs, or about half of what he said a normalized level might be. The bank expects this to eventually normalize, though it isn’t anticipating a rapid reversion. It says it may take until closer to the end of next year to get to prependemic net charge-off rates. Still, under current accounting rules, the bank may have to adjust its loan-loss reserves earlier, based in part on worst-case macroeconomic scenarios.

Then there are rising regulatory capital requirements, which influence the denominator part of return on equity. The bank said it expects to manage to a higher minimum capital ratio target as of the start of 2024. Though it can get there via earnings growth—and so it wouldn’t have to raise capital and dilute shareholders—this may limit cash available for share buybacks that would normally boost book value per share. That is a factor in book-value multiples.

The bank also spent significant time on Monday explaining the payoff for its spending on investments in areas such as cloud computing and travel services. But in this frightening market, investors might not be in any mood to pay for potential. Such a cautious, spend-conscious mind-set might have factored into the largely symbolic, nonbinding rejection of the bank’s compensation plan for Mr. Dimon and other top executives in a shareholder vote last week.

So after Monday, investors might be reassured. But don’t count on them getting excited yet.

Write to Telis Demos at [email protected]

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Credit: www.Businesshala.com /

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