Strong Start to the Year for JPMorgan
With the bank firing on all cylinders, we're raising our growth expectations and fair value estimate.
JPMorgan Chase (JPM) achieved a 19% reported return on tangible common equity during the first quarter—two percentage points better than management’s through-the-cycle target—as low credit costs (the commercial bank segment reported no losses at all during the quarter), rising short-term interest rates, and lower tax expenses all benefited the company. We are raising our fair value estimate to $103 per share to reflect increasing growth expectations.
Loan growth remained healthy, with reported average core loans up 8% over the last 12 months. However, management indicated that the competition is becoming more aggressive in the commercial lending space, resulting in a slight decline in commercial and industrial loan balances over the last three months. This is consistent with the most recent Senior Loan Officer Survey, which reported easing standards and rising confidence across the industry. We also note that the most recent spike in loan losses in early 2016 was related to commercial loans in the energy industry. We like that management is tightening standards at the expense of growth at this stage in the credit cycle, and guidance for the year (6%-7% core loan growth) is still encouraging.
Average client deposits in the commercial segment and within asset and wealth management declined over the course of the last 12 months, potentially due to sophisticated customers seeking higher rates elsewhere. Management remains cautious on deposit pricing overall, expecting rising rates to spark competition. We think that loan demand will be an important factor driving competition and increasing deposit beta, and it does not appear that banks are starved for funds. According to the FDIC, industrywide gross loans totaled just 72% of deposits in 2017, down from 91% in 2007 and 87% in 1997.
Regulatory changes are likely to marginally benefit the bank over time. Lower capital requirements would, at minimum, provide management with additional flexibility.
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Jim Sinegal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.