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Here's Why You Should Hold on to JPMorgan Despite Rate Cut

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Amid the current market turmoil, people are shying away from investing in equity markets, more so in banking stocks. Several factors, including the Federal Reserve’s accelerated move to cut interest rates to near zero, the coronavirus outbreak, and several economists and analysts’ prediction of a recession, have led to bearish investor sentiments.

The two emergency rate cuts reflect that the U.S. economy is slowing down. This will likely have an adverse impact on banks’ financials, as their performance largely depends on the nation’s economic health.

Also, near-zero interest rates will likely hurt banks’ top-line growth significantly, as net interest income (NII) and net interest margin will likely witness a fall. Further, reduced business activities due to the coronavirus outbreak are likely to result in lower demand for loans, at least over the next few months.

Further, as economic growth slows down, there will be a rise in delinquency rates. Thus, banks’ asset quality is expected to deteriorate. The factors suggest a grim near-term outlook for all the industry players.

If these concerns are weighing on your mind and you are thinking of getting rid of banking stocks, don’t take any hasty decision. There are many banks, which have solid fundamentals and strong growth prospects for the longer term.

Today, we are going to take a look at one of the well-known names in the industry— JPMorgan (JPM - Free Report) — the largest U.S. bank in terms of total assets. Similar to other industry players, the company’s shares have been adversely impacted by the coronavirus pandemic.

So far this year, the stock has lost 38.8% compared with the industry’s decline of 44.6%.Though the bank’s shares rallied 1.7% yesterday, it has been hitting 52-week lows for the past several days.

Year-to-Date Price Performance


Further, lower rates will hurt the company’s net interest yield. Notably, as the Fed had cut the interest rates thrice last year, its net interest yield contracted to 2.46% in 2019 from 2.52% in 2018.

Therefore, JPMorgan’s profitability is expected to take a hit from the above-mentioned factors over the next couple of quarters. Nonetheless, the bank’s financials are quite solid unlike during the 2008 crisis, when it along with other major industry players like Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) had to take a bailout package. Once these matters get resolved, JPMorgan is expected to swiftly regain its solid footing in the market.

Here’s Why JPMorgan Should be Part of Your Portfolio

The company’s organic growth is impressive. Over the last four years (2016-2019), NII witnessed a CAGR of 7.5%, driven by steady loan growth and higher rates. Also, JPMorgan remains focused on acquiring the industry's best deposit franchise and strengthening its loan portfolio. Thus, despite the Fed’s accommodative monetary policy stance, a continued rise in loan balances is expected to keep supporting the company’s interest income to an extent.

Further, JPMorgan has been expanding its footprint in newer markets. The bank aims to enter 15-20 markets by the end of 2022, by opening roughly 400 new branches. It has already made progress on this front, having added more than 70 branches in 16 new markets in 2019.

Apart from enhancing market share, the strategy will help the bank to grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the acquisition of InstaMed in July 2019 enabled JPMorgan to expand into the lucrative U.S. healthcare payments market.

At present, JPMorgan’s capital position is quite strong compared to the last financial crisis. Also, the company has been clearing the Fed’s annual stress test every year since 2011 and subsequently announcing enhanced capital deployment actions. It has come a long way from paying a dividend of 5 cents per share during the height of the financial crisis to the current 90 cents per share.

Annual Dividend for the Last Two Decades (in Dollar Terms)

Source: JPMorgan & Chase

The bank has also been rewarding shareholders through share buybacks. As part of its 2019 capital plan, share repurchase authorization was worth $29.4 billion. As of Dec 31, 2019, a repurchase authorization worth $15.8 billion remained. Nonetheless, JPMorgan has suspended its share buyback plan and intends to use the capital for lending activities amid the coronavirus outbreak-related slowdown.

The company currently carries a Zacks Rank #3 (Hold). This along the above-mentioned factors bode well for JPMorgan. Notably, its 2020 and 2021 earnings estimates of $10.57 and $11.42, respectively, have been stable over the past seven days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company also has an impressive earnings growth history. In the last three-five years, its earnings grew at a rate of 16.2%, higher than the industry average of 13.6%. Beside this, its long-term (three-five years) projected earnings growth rate of 5% promises rewards for investors.

Therefore, based on the above-mentioned factors, JPMorgan must be part of your investment portfolio as it will help generate solid returns over time.

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