Company Reports

Wide-moat-rated JPMorgan Chase earned bumper profits in the first quarter even as it was adversely affected by an FDIC special assessment charge of $0.725 billion for uninsured deposits of certain failed banks during the banking turmoil of the previous year. Excluding the nonrecurring FDIC special assessment charge, the bank reported earnings per share of $4.63, an increase of 13% year over year. The strong results were driven by solid net interest income and higher principal transaction (trading) revenue. The first-quarter numbers, after adjusting for the FDIC charge, resulted in a return on tangible equity of 22%, substantially higher than management’s midcycle ROTE target of 17%.

JPMorgan Chase is arguably the most dominant bank in the US With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Wide-moat JPMorgan reported a strong set of numbers in the fourth quarter, but profitability was adversely affected by an FDIC special assessment charge of $2.9 billion to cover uninsured deposits of certain failed banks during the banking turmoil in early 2023. Excluding this non-recurring charge, the bank reported fourth-quarter adjusted earnings per share of $3.97, higher than the $3.38 FactSet consensus estimate but lower than our own $4.18 projection for the period. While JPMorgan saw higher-than-expected net interest income, or NII, during the quarter, it was more than offset by materially lower principal transactions revenues, contributing to much of the difference from our estimate. The company's fourth-quarter results, after adjusting for the FDIC charge, resulted in a return on tangible equity of 19%.

JPMorgan Chase is arguably the most dominant bank in the United States. With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.

JPMorgan Chase is arguably the most dominant bank in the United States. With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.

Wide-moat JPMorgan reported yet another strong quarter, with earnings per share of $4.33, beating the FactSet consensus of $3.95. The result was primarily attributable to stronger net interest income, or NII, and lower expenses than expected. The bank also improved its full-year guidance. If banking is supposed to be under more pressure these days, somebody forgot to tell JPMorgan.

Wide-moat-rated JPMorgan reported second-quarter earnings per share of $4.75, beating both the FactSet consensus of $3.97 and our own estimate of $3.95. The beat was primarily attributable to stronger net interest income, or NII, better trading results, and lower-than-expected First Republic acquisition expenses. The bank enters the second half of 2023 in a strong position. Its adjusted return of tangible common equity of 23% reinforces our wide moat rating and the fact that the bank's fundamentals are some of the strongest under our coverage.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

JPMorgan Chase is arguably the most dominant bank in the United States. With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.

JPMorgan Chase has acquired First Republic Bank from the FDIC, effectively zeroing out First Republic equityholders. Because the latter bank is no longer a separately traded entity, we are dropping coverage of First Republic. We had assigned a very high probability (84%) that its shares were worth zero well over a month ago and actually dropped our fair value estimate to $0 on April 27. We were at the low end on the Street in both instances.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Wide-moat-rated JPMorgan Chase was able to expand its deposit base in the first quarter, beat our expectations and consensus on net interest income and fees, and materially raise its full-year NII outlook. Going into the quarter, we thought the largest banks would be fine amid the current banking turmoil, and while we expected profitability to face some pressure in the short term, in the longer term it would not be destroyed. JPMorgan reported a return on tangible equity of 23% in the first quarter, an exceptional result. Results support our contention that the bank’s moat is as wide as ever. We view the results positively, and while we do not want to read too much into through-the-cycle profitability based on peak earnings, we would expect our current $146 fair value estimate to go up slightly based on these results. We can’t read through too much to the smaller regionals just yet, but so far, we believe current results support our thesis that the banks are undervalued and will get through the current turmoil, and that JPMorgan was also slightly undervalued heading into its April 14 earnings release.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

JPMorgan Chase is arguably the most dominant bank in the United States. With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.

Wide-moat JPMorgan Chase reported solid fourth-quarter 2022 earnings per share of $3.57, beating FactSet consensus of $3.08 and our own estimate of $3.21. The main beat came from net interest income reaching $20.2 billion, roughly $1.2 billion above our own estimate. The bank’s return on tangible equity hit 20% in the quarter, and its efficiency ratio hit 53%, both excellent results. During the reporting of fourth-quarter 2022 results, the next year’s outlook is always a key data point, and here we saw no major surprises. We were expecting NII growth to slightly retreat from the fourth-quarter run rate as deposit costs catch up and market-related NII continues its decline, and the 2023 outlook of roughly $74 billion fits this narrative.

JPMorgan Chase is arguably the most dominant bank in the United States. With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, JPMorgan is truly a force to be reckoned with. The bank's combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy. Even the best-managed banks are not immune to the occasional stumble, but JPMorgan has managed to seemingly put all the pieces together in a more cohesive and less error prone way than peers. With the importance of scale and technology only increasing for the banks, we think it will be hard for competitors to catch up.