JPMorgan Shows Why Bank Stocks Are Stuck in Neutral

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The bank’s strong foundation was resilient during the turbulent third quarter, but it may not be enough to drive stock-price gains.

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Even credit growth, which has been weak so far as consumers and businesses sit on heavy cash piles, is showing some resilience. The bank highlighted that “card payment rates have stabilized” and reported quarter-on-quarter growth in card loans at the end of the period. Chief Financial Officer Jeremy Bynum told analysts that the bank “sees evidence of a normalization of excess deposits among the traditionally roaming population” – meaning some people’s cash cushions are shrinking, and they need to be able to borrow in the future. may need to be taken. Even the bank’s commercial real estate lending business now has a “robust origination pipeline”, he said.

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Yet it is not a bonanza. “It’s going to take time,” Mr. Barnum said of the credit card and recovery. The bank said that while credit utilization among mid-market businesses is increasing, it is stable but at a very low level among large corporations. JPMorgan’s average overall loan book grew 2% sequentially from the second quarter to the third quarter, slightly faster than the second quarter’s pace but similar to the first.

But the bank is also playing for the future, at some cost today. JPMorgan said it had higher spending for marketing in credit cards, which it said could sustain even higher. Adding customers builds the bank’s ultimate credit capacity — but it also results in an impact on revenue yields on card loans for now.

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JPMorgan can increase its interest revenue by deploying more of its huge cash pile typically driven by a flood of deposits in the market. but it’s not like that. Banks have hundreds of billions of cash available to transfer theoretically into high-yield instruments such as Treasury or mortgage bonds. But its quarter-average investment securities assets shrank from the second quarter to the third quarter.

Although the bank said there has been some rate hike recently, coming higher in line with its expectations, the rates on offer are still quite narrow due to the lack of liquidity in the system. Chief executive James Dimon told analysts he sees JPMorgan’s available liquidity as a way to prepare for potential inflation, which pushes rates and loan amounts higher in the future.

In general, JPMorgan is well positioned to profit from a pickup in activity once the supply chain becomes unregulated and demand borrows returns. It is adding market share to retail deposits and is still opening branches in new markets. Even under the earnings pressure of lower rates, the bank still operates with a core capital ratio that is well above its target level, and its projected supplementary leverage ratio has improved from Q2 to Q3. “Our Capital Cup is over,” said Mr. Dimon.

Yet that strong foundation doesn’t necessarily translate into near-term stock gains, as evidenced by the more than 2% drop this morning. In fact, the bank’s overall solid share performance, achieving over 25% so far this year, can’t help matters for now. The appeal of share buybacks to management diminishes as the stock’s valuation gets higher, and it’s already hovering around 2.5 times tangible book value.

Of course, capital that might otherwise go into buybacks can be deployed later in a better earnings environment. Shareholders may have to be prepared for some delayed gratification.

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