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Stock Analyst Update

2 Things That Can Pinch JPMorgan's Earnings Growth

We continue to expect positive results from the narrow-moat bank, but there are signs of both macro and micro pressures that can slow earnings growth.


Narrow-moat  JPMorgan Chase (JPM) reported solid second-quarter results with net income on a reported basis increasing 18% to $8.3 billion, or $2.29 per diluted share, compared with $7 billion a year ago. Despite increasing concerns about global trade policies and a flattish U.S. interest rate yield curve, the underlying economy is still healthy and the company generated a return on equity of 14% and return on tangible common equity of 17% during the quarter. Coinciding with the release of 2018 Comprehensive Capital Analysis and Review results, the company announced that it is increasing its quarterly dividend to $0.80 from $0.56 effective in the third quarter and plans to repurchase up to $21 billion of shares in the next four quarters. We don't anticipate making a material change to our $103 fair value estimate for JPMorgan and believe that shares are fairly valued.

We continue to expect positive results from JPMorgan, but there are signs of both macro and micro pressures that can slow earnings growth. The interest rate yield curve has remained stubbornly flat with the Federal Reserve having increased the Fed Funds rate 50 basis points since the beginning of 2018 to a range of 1.75% to 2%, but the 10-year Treasury yield has remained fairly range bound between 2.8% and 2.9% since February. This flatter yield curve can restrain net interest income growth, as competition for deposits increases the rate banks pay on deposits, while limiting the yield from banks' longer dated interest earning assets. Besides general rate environment pressure, banks are apparently competing more in certain loan categories like residential and commercial real estate loans. This may keep yields on these loans relatively low, while as the same time stunting loan growth, as JPMorgan becomes more selective.

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Michael Wong 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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