Continuation of a series of publications with reviews of various large stock market companies (“Blue Chips”), today we have JPMorgan Chase under consideration:
As usual, we divide our review into 3 parts:
1) General part
JPMorgan Chase is one of the leading international financial holdings headquartered in New York with operations around the world. With total assets of about $4 trillion, JPMorgan is the largest bank in the United States and provides a full range of financial services, including retail and corporate banking, investment banking, brokerage and custody services, asset management services, and more. The bank has more than 270,000 employees .
Consumer banking accounts for 39% of JPMorgan’s revenue. This division serves more than 66 million individuals and 5 million small businesses (with annual turnover up to $5 million) in the United States, while the bank is among the leaders in mortgage lending and issuance of credit cards in the country. The scope of the investment bank (40% of revenue) is servicing large corporations, investors, financial institutions and governments, with about half of the operations carried out outside the States. Note that JPMorgan is the world leader in the investment banking market with a 9.5% share.
The commercial banking division (8% of revenue) provides a full range of financial services to medium-sized companies with an annual turnover of $ 20 million to $ 2 billion, including lending, treasury services, etc. Finally, the asset management segment (13% of revenue) provides wealth management services super-wealthy citizens and institutional investors. The division’s clients include more than half of the world’s largest pension and wealth funds.
Geographically, operations in North America account for 76% of the bank’s total revenue, followed by EMEA (14%), Asia (8%) and Latin America (2%).
I note that JPMorgan is one of the most advanced banks in the US in terms of business digitalization. Back in 2018, the lender announced the everything digital strategy aimed at creating a comfortable digital environment for customers, and over the past years has made significant progress in its implementation. Thus, at present, more than 80% of the bank’s retail clients actively use digital channels for obtaining banking services. And the number of JPMorgan mobile banking users increased by 11% over the year to 46.5 million.
The medium-term outlook for the US banking sector is currently clouded by significant uncertainty. Bank executives note that the current financial situation of consumers and companies, as well as consumer spending in the United States, remain at a good level. However, in the future, they see significant geopolitical and economic challenges associated with high inflation, problems in supply chains and the conflict in Ukraine.
Nevertheless, many analysts maintain a cautiously positive long-term outlook on the sector. Despite rising risks, the current projections in the baseline scenario do not assume a recession in the global economy in the coming years. In particular, according to the April IMF estimate, global GDP will grow by 3.6% in 2022 and 2023, with positive dynamics expected in all leading countries and regions of the world. And against this background, the banks will continue to feel relatively good, although their results this year will, apparently, not be the strongest.
The expected further growth of rates in the US will have a positive impact on the interest rate business of banks. In addition, after tensions ease in Eastern Europe and the market situation returns to normal, the equity and bond underwriting and M&A markets can be expected to recover, although we are unlikely to see a repeat of the records of 2021. In the context of accelerating inflation in the world, one can expect high demand for capital and investment management services to continue, which will continue to support bank divisions operating in this area. At the same time, provisioning spending across the sector is likely to continue to “normalize” in the coming quarters, further putting significant pressure on earnings.
I think that thanks to a diversified business model, as well as strong positions in all major segments, JPMorgan will be able to go through a difficult 2022 without significant shocks, and its profit will resume growth from next year.
JPMorgan’s business, like the sector as a whole, is highly dependent on economic and market conditions. In the event of its further significant deterioration, we can expect a decrease in customer activity and demand for the bank’s products and services, losses from the revaluation of investment portfolios, and a negative impact on the bank’s financial position.
B) Financial indicators
JPMorgan’s financial results for the 1st quarter of 2022 were rather weak. Net income fell 42.1% year-on-year to $8.3 billion, or $2.63 a share, and was 9 cents below Wall Street’s average estimate. At the same time, the ROE dropped to 13%.
The bank’s quarterly revenue fell 4.6% y/y to $31.6bn, although it beat the consensus estimate of $30.6bn. Net interest income rose 7.5% to $14bn, against the backdrop of increased lending, with a relatively stable net interest margin. Meanwhile, non-interest income sank 12.4% to $17.6 billion. In particular, investment banking revenue fell 27.8% to $2.1 billion due to a sharp weakening of M&A activity in the world, as well as a decrease in the volume of placements of shares and bonds, and income from trading operations decreased by 7.9%, to $ 9.3 billion. This was partially offset by a growth in revenue in the field of asset management by 5.8%, to $ 4.3 billion, helped by a 4% increase in assets under management to $3 trillion.
Operating expenses rose 2.5% to $19.2 billion and the cost/income, or CI, declined 4.2 percentage points to 60.8%. At the same time, the creation of reserves for possible losses on loans in the amount of $ 902 billion (in the first quarter of 2021, the bank, on the contrary, released reserves in the amount of $ 5.2 billion), which was caused by worsening forecasts for the global economy due to rising inflation in the world and the military conflict in Ukraine, as well as expectations of losses in connection with the curtailment of operations in the Russian Federation.
As of the end of the first quarter, JPMorgan’s assets amounted to $3.96 trillion, up 7.2% y/y. The volume of the loan portfolio rose by 6.1% to $1.07 trillion, deposits grew by 12.4% to $2.56 trillion. The total amount of reserves to cover possible losses on loans amounted to $ 19.6 billion, or 1.69% of all loans issued, at the end of the reporting period, an increase from $ 18.7 billion, or 1.62%, at the beginning of this year. At the same time, the indicator remains significantly lower than $25.6 billion, or 2.42% of the loan portfolio recorded a year ago. Tier 1 capital adequacy ratio (CET1) decreased to 11.9% from 13.1% at the beginning of the year, but remains at a quite comfortable level.
The company consistently pays dividends of $4 (3.23%). The company allocates an average of $700 million a year to buyback programs.
- Enterprise value including net debt/earnings before depreciation, interest and taxes (EV/EBITDA) – for this industry is not measured at a better industry value of return on equity (EV/EBITDA of a company – with a return on equity of 15.9% at average for the industry: – with a return on equity of 12.2%).
- Beta is below the industry average (1.11 against an industry average of 1.39). This means that in the future, stocks may show weaker upside volatility than the industry average (But downside volatility will also be lower).
- The P/E value of 9.18 is below the industry average of 10.67, providing an additional layer of security in adverse market conditions.
- Operating margin: 96.3% with industry average: 91.6% and gross profit: – industry average – (Not measured for the industry), better than the industry average, which in turn creates a level of security for the company subject to adverse events.
- Price/Free Cash Flow is well above the industry average of 5.31 versus the industry average of 7.92
- The current (total) liquidity ratio for the industry is not measured
- The combination of the last three indicators (Price / Free Cash Flow, Current (Total) Liquidity Ratio, Return on Equity Ratio) indicates a stable state of the company, with good development potential, due to good management decisions, but still do not forget and about the risks due to the current macroeconomic and macropolitical situation.
2) Technical picture
The company is currently trading medium in the medium term (Up to six months), according to the main technical indicators, while it is estimated to be medium in the long term (from one and a half years). The price is far from the historical highs, moving inside the descending channel, along the waves – there is a global corrective wave A. According to VSA, there is a probable zone of weak protection by the buyer, its 0.5 zone, after which further local price movement will be determined, in my opinion, given how protection is going, there will be further downward movement after local cancellation. There are no grounds for starting reversal patterns to break the downtrend in terms of moving averages and Macdi. Average daily volatility – 1.83%, average interday gap – 0.31%, average daily trading volume – 1 billion 946 million 932 thousand dollars. Market capitalization – 365 billion dollars. EPS – 13.48, Beta – 1.11.
3) Grand total
In my opinion, for investing for a period of up to six months, the company is currently quite dangerous due to the lack of clear signals for the end of the downward movement. Speculation is possible on local rollbacks of the average long trade no more than 9 business days (Low volatility). For long-term investors, this company may be of interest because of the fundamentals, good dividends, and the ability to get a very good income in the long term with little risk.
Long entry is possible only after a pullback movement and the resumption of strong buyer positions (Upward movement with an equal or stronger trajectory than before)