J.P. Morgan Sees Rate Benefit, Wells Still Solid
Earnings seasons kicked off in earnest today with results from some of the largest banks.
Despite a fall-off in typically volatile trading revenue over the past three months, narrow-moat JPMorgan Chase managed to increase both core loans and deposit balances at a high-single-digit rate over the past year, while noninterest expenses expanded at a 6% rate.
The bank is starting to see a benefit from higher rates and management expects 2017 net interest income to rise by about $4 billion from last year’s $46 billion total. There are two factors that we believe will mute the effect of higher rates on the bank’s cost of funding. First, banks are not starved for deposits, so competitors are unlikely to aggressively raise rates in order to win business. Second, we think retail depositors may be hesitant to lock in relatively low rates in an environment of increasing rates.
We plan to maintain our $83 fair value estimate and see these results as boding well for the rest of the sector.
Wells Fargo has been in the news for the wrong reasons over the last year, but second-quarter results show the firm’s wide-moat is very much intact.
Deposit balances grew by 5% over the past 12 months to $1.3 trillion, and the firm was able to maintain deposit pricing discipline. According to the company’s disclosures, customer satisfaction ratings for branch visits are actually up slightly from the second quarter of 2016—which was before the company’s sales misbehavior was widely publicized—and loyalty ratings continue to rebound. We think these metrics are evidence that the company’s low-cost funding base is still in place, and that operational improvements should contribute to outstanding returns over time.
Our $67 fair value estimate remains in place.