JPMorgan Has Solid Quarter, Upside Limited
The bank is seeing the benefit of a growing economy and rising rates, but shares are fully valued.
Narrow-moat JPMorgan Chase (JPM) earned $1.76 per diluted share in the third quarter, in line with our expectations, as a growing economy contributed to improved performance in a variety of key metrics. We don’t intend to make significant changes to our fair value estimate. Our $83 fair value estimate represents 1.5 times current tangible book value, and the bank’s reported 13% return on tangible common equity does not warrant a more aggressive valuation, in our view.
We previously hypothesized that persistent trends in demographics, leverage, and technology would contribute to a slow normalization of interest rates, and the Federal Reserve’s September meeting minutes indicate that the central bank acknowledges these concerns to some extent. Inflation remains persistently lower than the Fed’s 2% target, and long-term rates declined over the past quarter. However, JPMorgan is already benefiting from rate movements, with net interest income rising 10% during the year, and we expect the continued normalization of the rate environment over the next several years to contribute to a $17 billion increase in net interest income by 2021.
Deposit-gathering activity remained solid, with total balances up 5% during the year, though flat from the previous quarter. At the same time, zero-cost balances fell, replaced by interest-bearing deposits. We believe that competition for deposits is unlikely to heat up until rates approach more normal levels, and the reported results support that belief. Yields on interest-bearing deposits have increased by 17 basis points through the first nine months of 2017, with yields on interest-earning assets up by 37 basis points over the same time period. JPMorgan had no issues funding loan growth--its loans/deposit ratio was only 63%. We believe loan demand will be the primary factor affecting bank results over the next several years. On this front, the results were acceptable, though not exceptional.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.