ii view: JP Morgan expects robust multi-year economic growth

A fortress balance sheet and both dividends and share buy-backs restarted. Buy, sell or hold?

First-quarter results to the end of March 

• Net revenue up 14% to $33.12 billion
• Net income up 399% to $14.3 billion
• Earnings per share up 477% to $4.50

Chief executive Jamie Dimon said:

“We continue to make significant investments in products, people, and technology, all while maintaining credit discipline and a fortress balance sheet.

“With all of the stimulus spending, potential infrastructure spending, continued quantitative easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth.”

ii round-up:

US banking giant JPMorgan Chase & Co (NYSE:JPM) today reported revenue and profit which beat Wall Street expectations, aided by both strong trading for its financial markets business and the return of cash from previously set aside bad debt provisions. 

Revenue of $33.12 billion (£24 billion) and earnings per share of $4.50 surpassed analyst forecasts nearer to $30.5 billion and $3.10 per share, helped by economic recovery and the non-use of $5.2 billion formerly set aside to cover pandemic loan impairments. 

JP Morgan shares fell by round 0.5% in early US trading having risen by more than 60% over the last year. Shares for both Citigroup (NYSE:C) and Deutsche Bank (XETRA:DBK) are up by similar amounts, while shares of Asia-Hong Kong focused HSBC (LSE:HSBA) are little changed.

Investment banking fees rose 57%, helping to push revenues up by $2 billion. Fixed Income sales within its Markets & Securities business climbed 15% to $5.8 billion, while equity market related revenues surged by 47% to $3.3 billion. Assets under management for its wealth management business increased 28% to $2.8 trillion. 

For its more traditional banking operations, consumer and business banking net revenue retreated by 10% to $5.6 billion. Credit card and auto revenues fell by 7% to $5.4 billion, driven by lower card balances as consumers looked to reduce debt. Mortgage applications are expected to slow given the recent rise in interest rates with overall loan demand summarised as “challenged". Average deposits during the quarter across the bank rose by 36%. 

In March, JP Morgan the biggest US bank by stock market value, declared a quarterly dividend of 90 US cents per share. Unchanged from the previous quarter. The bank also restarted share buybacks, previously suspended under pandemic caution, purchasing $4.3 billion of common stock. 

ii view:

JP Morgan operations cover both traditional consumer and corporate banking, along with investment banking and asset management. North America generates around three quarters of its revenues, leaving the mammoth bank as something of a bellwether for the wider US economy. 

For investors, an estimated price to net asset value of 1.7 times is above the 1.5 times three-year average, suggesting the shares are not necessarily cheap. Pandemic outlook uncertainty cannot be dismissed, and corporation tax rises are now being considered by the new US Biden government. Challenging loan demand could also suggest that big corporate customers at least have already raised finances in the markets given ultra-low interest rates. 

That said, heavy early bad-debt provisioning under the Covid-19 crisis now looks to be paying off. A diversified business model covering both traditional and investment banking continues to show its worth, while shareholder returns following what should prove to be the very worst of the pandemic are back in focus. In all and given the chief executive’s description of what he calls the bank’s “fortress balance sheet,” JP Morgan arguably remains a core long-term play on US economic prospects. 

Positives: 

• Business diversity
• Recommenced shareholder returns

Negatives:

• Ongoing pandemic uncertainty
• Lower interest rates are broadly bad for bank profitability

The average rating of stock market analysts:

'Buy'