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What Makes JPMorgan (JPM) a Compelling Buy Among Big Banks
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Big banks – JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) – always remain on investors’ radar. This year has been a bad one for the banking sector, bringing the Wall Street giants all the more into the spotlight.
Ever since deposit flight gripped the sector in early March and resulted in the collapse of three sizeable lenders (Silicon Valley Bank, Signature Bank and First Republic Bank), investors have been reluctant to add bank stocks to their portfolios.
The Federal Reserve has raised the interest rates to a 22-year high of 5.25-5.5%, and this is turning out to be a big headache for banks. Unlike the normal times when higher rates support banks’ financials, it is the opposite right now because of the faster pace of hikes.
Banks are struggling to sustain profitability amid other challenges, including rising deposit costs, weakening credit, largely in commercial real estate, ambiguity related to new capital regulations and the future path of interest rates.
This is reflected by investor apathy toward the sector. So far this year, the KBW Bank Index is down 18.6% and the Nasdaq Bank Index has declined 17.9%. On the other hand, the S&P 500 Index is trading in green, up 17.8%.
Instead of totally avoiding banks, one should look for fundamentally solid stocks to buy. The first names that come to mind are JPM, BAC, C and WFC.
Among these, JPMorgan seems to be poised to perform better than the others. This can also be seen through their price performance since the beginning of the year. JPM’s shares have gained 11.7% so far this year, well ahead of Wells Fargo, Bank of America and Citigroup.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Before we discuss factors that will continue to support JPM amid the current challenging times, let’s check why BAC, C and WFC stocks are not garnering much investor interest.
Bank of America, which is the most interest rate sensitive among its peers, was sitting on unrealized losses on securities of almost $132 billion at the end of third-quarter 2023. Also, the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, continue to weigh on net interest income (NII) and net interest margin (NIM) performance.
For Citigroup, which is undergoing a big organizational overhaul, investors seem to be following the wait and watch approach. Further, the lender has been shrinking its consumer banking business across several global markets. While these large restructuring initiatives are likely to help it in the long term because of business simplification, these are likely to put pressure on financials in the near term as the operating backdrop is also challenging.
Wells Fargo, which remains under the regulatory spotlight because of a sales scandal revealed in 2016, continues to face an asset growth cap. This lowers the chance of the company growing exponentially until the cap is removed by the Fed.
On the other hand, JPMorgan has grown bigger. Since the regulatory-assisted acquisition of First Republic Bank in May, the company has been reaping huge benefits from higher rates and modest loan demand. Before the deal was announced, the company had guided NII to be $81 billion this year. Now, after the third-quarter 2023 results, NII is targeted to touch $88.5 billion.
The transaction, which added deposits of almost $92 billion, nearly $173 billion of loans and $30 billion of securities to the banking behemoth’s balance sheet, continues to be accretive to the top and the bottom lines.
This Zacks Rank #1 (Strong Buy) company is also growing through on-bolt acquisitions, both domestic and international. This August, it announced plans to increase its stake in Brazil's C6 Bank to 46% from 40%. In June, the company formed a strategic alliance with Cleareye.ai, a financial technology firm focused on trade finance. These, along with several others, are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are a few other factors that make JPM stock an attractive investment option:
Earnings Growth: JPMorgan witnessed earnings growth of 13.4% in the past three to five years, which is higher than the industry average of 4.7%. The uptrend is expected to continue in the near term. For 2023, we project the company’s earnings to jump 37.2%.
Also, its long-term (three-five years) expected earnings growth rate of 5% promises rewards for investors.
Organic Footprint Expansion: In 2018, JPM announced plans to enter 25 new markets by opening 400 new branches. The company has made substantial progress on this front, with a presence in 48 of 50 U.S. states. It intends to expand its retail branches further.
The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to expand the reach of its digital bank across the European Union countries.
Green Shoots in Investment Banking (IB) Business: Global deal-making has come to a grinding halt since last year due to elevated inflation, higher rates, worsening macroeconomic outlook and volatility across the global financial markets. Hence, JPMorgan’s IB fees plunged 59% in 2022 and 10% in the first nine of 2023. JPMorgan continued to rank #1 for global IB fees with an 8.6% wallet share.
But now the company is seeing encouraging signs in the business, which is likely to rebound and grow at a decent pace once the macroeconomic and geopolitical ambiguity is over.
JPMorgan is likely to witness growth in IB fees driven by a healthy IB pipeline and active merger & acquisition market and leverage its top position to further gain from the changed scenario. While we expect IB fees to decline 5.5% in 2023, the same will rebound with 2.8% year-over-year growth in both 2024 and 2025.
Enhanced Capital Distributions: JPMorgan’s capital distribution activities seem impressive. Following the clearance of the 2023 stress test, the company increased its dividend by 5% to $1.05 per share, which follows no change in dividend payout last year.
Also, it plans to continue with its previously announced share repurchase program. It announced earlier that it intends to repurchase shares worth $12 billion this year. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital distributions.
Superior Return on Equity (ROE): JPMorgan has an ROE of 17.97%, higher than the industry average of 12.19%. This shows that the company reinvests its cash more efficiently than its peers.
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What Makes JPMorgan (JPM) a Compelling Buy Among Big Banks
Big banks – JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) – always remain on investors’ radar. This year has been a bad one for the banking sector, bringing the Wall Street giants all the more into the spotlight.
Ever since deposit flight gripped the sector in early March and resulted in the collapse of three sizeable lenders (Silicon Valley Bank, Signature Bank and First Republic Bank), investors have been reluctant to add bank stocks to their portfolios.
The Federal Reserve has raised the interest rates to a 22-year high of 5.25-5.5%, and this is turning out to be a big headache for banks. Unlike the normal times when higher rates support banks’ financials, it is the opposite right now because of the faster pace of hikes.
Banks are struggling to sustain profitability amid other challenges, including rising deposit costs, weakening credit, largely in commercial real estate, ambiguity related to new capital regulations and the future path of interest rates.
This is reflected by investor apathy toward the sector. So far this year, the KBW Bank Index is down 18.6% and the Nasdaq Bank Index has declined 17.9%. On the other hand, the S&P 500 Index is trading in green, up 17.8%.
Instead of totally avoiding banks, one should look for fundamentally solid stocks to buy. The first names that come to mind are JPM, BAC, C and WFC.
Among these, JPMorgan seems to be poised to perform better than the others. This can also be seen through their price performance since the beginning of the year. JPM’s shares have gained 11.7% so far this year, well ahead of Wells Fargo, Bank of America and Citigroup.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Before we discuss factors that will continue to support JPM amid the current challenging times, let’s check why BAC, C and WFC stocks are not garnering much investor interest.
Bank of America, which is the most interest rate sensitive among its peers, was sitting on unrealized losses on securities of almost $132 billion at the end of third-quarter 2023. Also, the company’s billions of dollars’ worth of long-dated Treasuries and mortgage bonds, which it piled up at low rates that prevailed during the pandemic, continue to weigh on net interest income (NII) and net interest margin (NIM) performance.
For Citigroup, which is undergoing a big organizational overhaul, investors seem to be following the wait and watch approach. Further, the lender has been shrinking its consumer banking business across several global markets. While these large restructuring initiatives are likely to help it in the long term because of business simplification, these are likely to put pressure on financials in the near term as the operating backdrop is also challenging.
Wells Fargo, which remains under the regulatory spotlight because of a sales scandal revealed in 2016, continues to face an asset growth cap. This lowers the chance of the company growing exponentially until the cap is removed by the Fed.
On the other hand, JPMorgan has grown bigger. Since the regulatory-assisted acquisition of First Republic Bank in May, the company has been reaping huge benefits from higher rates and modest loan demand. Before the deal was announced, the company had guided NII to be $81 billion this year. Now, after the third-quarter 2023 results, NII is targeted to touch $88.5 billion.
The transaction, which added deposits of almost $92 billion, nearly $173 billion of loans and $30 billion of securities to the banking behemoth’s balance sheet, continues to be accretive to the top and the bottom lines.
This Zacks Rank #1 (Strong Buy) company is also growing through on-bolt acquisitions, both domestic and international. This August, it announced plans to increase its stake in Brazil's C6 Bank to 46% from 40%. In June, the company formed a strategic alliance with Cleareye.ai, a financial technology firm focused on trade finance. These, along with several others, are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are a few other factors that make JPM stock an attractive investment option:
Earnings Growth: JPMorgan witnessed earnings growth of 13.4% in the past three to five years, which is higher than the industry average of 4.7%. The uptrend is expected to continue in the near term. For 2023, we project the company’s earnings to jump 37.2%.
Also, its long-term (three-five years) expected earnings growth rate of 5% promises rewards for investors.
Organic Footprint Expansion: In 2018, JPM announced plans to enter 25 new markets by opening 400 new branches. The company has made substantial progress on this front, with a presence in 48 of 50 U.S. states. It intends to expand its retail branches further.
The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to expand the reach of its digital bank across the European Union countries.
Green Shoots in Investment Banking (IB) Business: Global deal-making has come to a grinding halt since last year due to elevated inflation, higher rates, worsening macroeconomic outlook and volatility across the global financial markets. Hence, JPMorgan’s IB fees plunged 59% in 2022 and 10% in the first nine of 2023. JPMorgan continued to rank #1 for global IB fees with an 8.6% wallet share.
But now the company is seeing encouraging signs in the business, which is likely to rebound and grow at a decent pace once the macroeconomic and geopolitical ambiguity is over.
JPMorgan is likely to witness growth in IB fees driven by a healthy IB pipeline and active merger & acquisition market and leverage its top position to further gain from the changed scenario. While we expect IB fees to decline 5.5% in 2023, the same will rebound with 2.8% year-over-year growth in both 2024 and 2025.
Enhanced Capital Distributions: JPMorgan’s capital distribution activities seem impressive. Following the clearance of the 2023 stress test, the company increased its dividend by 5% to $1.05 per share, which follows no change in dividend payout last year.
Also, it plans to continue with its previously announced share repurchase program. It announced earlier that it intends to repurchase shares worth $12 billion this year. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital distributions.
Superior Return on Equity (ROE): JPMorgan has an ROE of 17.97%, higher than the industry average of 12.19%. This shows that the company reinvests its cash more efficiently than its peers.