ii view: JP Morgan stock keeps rising after robust quarter

Shares in this US banking giant have recovered strongly since October and latest results are encouraging. Buy, sell, or hold?

Fourth-quarter results to the 31 December 

• Revenue up 17% $35.6 billion
• Net income up 6% to $11 billion
• Earnings per share up 7% to $3.57

Chief executive Jamie Dimon said:

“The U.S. economy currently remains strong with consumers still spending excess cash and businesses healthy. However, we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening. We remain vigilant and are prepared for whatever happens."

ii round-up:

US banking giant JPMorgan Chase & Co (NYSE:JPM) today reported both revenues and earnings which beat Wall Street estimates, but it issued cautious outlook comments as it set aside higher-than-expected bad debt provisions. 

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Revenue of $35.6 billion exceeded analyst forecasts of $34 billion, pushed higher by a 48% increase in interest income to $20.3 billion following a series of Federal Reserve rate hikes. That’s up from $12 billion at the start of 2022, helping earnings rise by 7% year-over-year to $3.57, although bad debt provisions of $2.3 billion compared with estimates of $2 billion. 

JP Morgan shares rose more than 1% in early US trading having come into this latest announcement down by close to a fifth over the last year. European rival Barclays (LSE:BARC) is down by a similar amount, while the benchmark S&P 500 has fallen by 14%. 

Revenues for its more traditional banking business rose 29% to $15.8 billion, aided by a 2% increase in the average loan size. A 12% increase in card services and autos revenues to $5.6 billion helped counter a near halving in home lending related revenues to $584 million.

At its corporate and investment banking business, investment banking related sales more than halved to $1.4 billion, with fees dropping 58%. Fixed income and foreign exchange related revenues did however rise, while equity market related revenues proved flat year-over-year. Overall divisional net income fell by just over a quarter to $3.3 billion.

Assets under management for its wealth division fell 11% to $2.8 trillion, crimped by falling markets and net outflows. 

The Jamie Dimon headed bank declared a Q4 dividend of $1 per share in December, in line with the prior third quarter. 

ii view:

JP Morgan's operations cover both traditional consumer and corporate banking along with investment banking and asset management. A stock market value of over $400 billion is comfortably above second place Bank of America Corp (NYSE:BAC) at around $275 billion and more than four times that of Citigroup Inc (NYSE:C). Its home market of North America generates its biggest slug of sales at around three-quarter of overall revenues, with Europe and Africa next in line at over a tenth. 

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For investors, accompanying management comments highlighting the cocktail of outlook uncertainties cannot be overlooked. A hike too far in interest rates could push the US economy into recession, possibly adding to the need for future bad-debt provisions, while recent job layoffs from tech giants such as Amazon could start to squeeze unemployment higher. 

On the upside, bad debt provisions already being taken may prove sufficient to cover the downturn in the economy, with the bank only recently over provisioning for the pandemic. Rising interest rates are increasing overall revenues given the push to interest income, while the benefits of a diversified business model covering both traditional and investment banking continues to show its worth. An estimated future dividend yield of close to 3% is respectable too.

For now, and while obvious reasons for caution persist, JP Morgan’s size leaves it as something of a play on the world’s largest economy, with its place in many already diversified portfolios arguably still justified. 

Positives: 

• Business diversity
• Investing in technology

Negatives:

• Economic outlook uncertainty
• Rising staff costs

The average rating of stock market analysts:

Buy