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Stock Analyst Update

More Strong Results From JPMorgan

We’re raising our fair value estimate for the narrow-moat bank after the third-quarter earnings shows the firm firing on all cylinders.

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Narrow-moat  JPMorgan Chase (JPM) reported solid third-quarter results with net income on a reported basis increasing 24% to $8.4 billion, or $2.34 per diluted share. This was largely in line with our overall thesis for the banking industry in general, and JPMorgan specifically. We expected high double-digit earnings growth year over year, driven by rising interest rates, tax reform, and a strong U.S. economy. JPMorgan generated a return on tangible common equity of 17% during the quarter, largely matching last quarter’s performance. This is already on par with management’s long-term goal for the bank, which signals to us that JPMorgan is and has been firing on all cylinders and is much closer to full capacity than some of its competitors. 

After making several changes to our projections, including adjusting our cost of equity for the bank to 9.5%, down from 11%, we are increasing our fair value estimate to $118 per share, up from $106.

While worries seemed to originally be about a flattening yield curve, it is interesting to us that bank stocks have taken such a hit with the yield curve finally steepening. Management stated that a rising 10-year Treasury yield is indeed positive for their earnings, as we would have expected. A steepening yield curve will tend to increase net interest margins as securities yields rise, as well as yields on longer duration loans, such as mortgages. Further, to the extent that the rising 10-year yield represents the market’s view that the economy is likely to be stronger in the future, that would also be a positive for banks.

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

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