Tough Quarter for JPMorgan; Lowering Fair Value
The wide-moat firm is preparing for loan losses after weak results.
Wide-moat JPMorgan Chase (JPM) reported weak first-quarter results with net income coming in at $2.9 billion, or $0.78 per diluted share, though this is unsurprising given the impact of the COVID-19 pandemic on the global economy. Return on tangible common equity was reported at 5%, which was impacted by a number of items, including a large buildup of credit reserves, widening funding spreads on derivatives, and a markdown on the bank's bridge loan book. The biggest item was the large build in credit reserves of $6.8 billion, leading EPS to be down 76% compared with the year-ago period. Ignoring the reserve builds and other significant items, core earnings were actually not that bad. Net revenue was down 3% year over year while expenses were up 3%. While JPMorgan maintained its share repurchase program for the majority of the first quarter (average diluted shares outstanding fell 6% year over year), it's important to note that the bank has since suspended share buybacks in light of the coronavirus crisis. Management did provide some updated guidance around expenses, net interest income, and the general direction of fee income; however, the biggest unknown remains future credit costs. It is simply impossible to know exactly how COVID-19 and the economy will develop, and it is therefore impossible to know exactly what credit losses will look like in second quarter and for the rest of the year. Second-quarter earnings will give us much more information, but for now, loss rates appear manageable. We believe that losses would have to be dramatically worse than what occurred in first quarter for the bear-case scenario to start playing out. After updating our models for the latest results, we are predicting another large reserve build in second quarter, after which losses begin to level out. We have also incorporated the latest rate cuts and expectations for lower fee income, leading to a new fair value estimate for JPMorgan of $113, down from our previous estimate of $117.
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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.