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Stock Analyst Update

Solid Fees Drive Good 2Q Results for JPMorgan

We are increasing our fair value estimate for the wide-moat firm.

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Wide-moat JPMorgan (JPM) reported excellent second-quarter earnings, blowing out the FactSet consensus estimate of $3.20 per share with reported EPS of $3.78. This equates to a return on tangible common equity of 23%. Adjusted for the reserve release, ROTCE was 18%. While we had adjusted our estimates to account for larger reserve releases than we previously predicted, the firm's provisioning for credit losses again came in better than expected. The bank released another $3 billion in reserves, on top of the $5.2 billion it released last quarter. With loan-loss reserves at $19.5 billion, putting the loan reserve ratio at roughly 1.9% (excluding the Paycheck Protection Program), the bank still arguably has room for additional reserve releases, although most of the releases should be behind us at this point.

Again, predicting the timing is difficult, and these boosts to earnings are temporary. On a core revenue basis, management had lowered its guidance for full-year net interest income to $52.5 billion from $55 billion. Management also increased its 2021 expense guidance to $71 billion from $70 billion, again driven by higher revenue-related expenses. JPMorgan is in an enviable spot for a bank, getting outsize boosts from investment banking and trading fees, but we think these will fade over time, and pressure will remain on net interest income in this lower rate environment. On the bright side, the continual growth of asset- and wealth-management fees seems sustainable, and card-related volumes and revenue are coming back in a big way.

After adjusting our projections, we are increasing our fair value estimate to $143 per share from $140. Within this we have updated our rate-hike outlook to include increases starting in late 2023, a bit earlier than we had previously expected, and we have also incorporated a corporate tax hike to a statutory rate of 26%.

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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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