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JPMorgan Affirms Profitability Goals, Expects Costs to Rise

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Being one of the biggest global banks with exposure to almost all major banking businesses, JPMorgan’s JPM annual Investors Day conference is closely watched by investors to gauge the performance of the overall banking sector.

One important question in investors’ mind at present is the impending economic slowdown and its impact on banking industry. While keeping its medium-term profitability goal of 17% return on tangible equity intact, JPMorgan cautioned about a slowdown in lending.

The bank expects expansion in its loan book to slightly lose pace despite having “focus on high-quality loans.” This marks a marginal shift from the company’s bullish stance of the last few years that was driven by expectations of increasing profitability from rising interest rates and lower tax rates.

Further, JPMorgan will likely face rising costs for deposits. The company’s Chief Financial Officer Marianne Lake stated that deposit growth is expected to decline, while interest paid on the same will increase. This will lower the company’s profit margins on loans.

Despite the Federal Reserve’s near dovish stance on future rate hike, rise in deposit costs and expectations of economic slowdown in the United States, JPMorgan projects net interest income to increase $2.5 billion in 2019, driven by higher interest rates.

While justifying not raising its profitability target, the company’s CEO Jamie Dimon said “We are not predicting a recession. We are prepared for a recession.”

Further, JPMorgan expects to continue investing in businesses in a recession, with plans to expand branch network. Per of its plan announced last year, the bank intends to expand its branch network to cover nearly 93% of the U.S. population by 2022-end. Likewise, Bank of America BAC is also expanding its branch network to newer areas. This expansion strategy is despite that fact that there is a significant consumer shift to mobile and online banking.

Also, the company is focused on expanding its credit card operations amid fierce competition from major card issuers like American Express AXP and Discover Financial Services DFS. JPMorgan sees substantial growth opportunities as it unveiled new features with an aim to capture more of the $250 billion that its clients borrow from other firms.

Other major highlights from JPMorgan’s Investors Day include:

  1. Operating expenses to be approximately $66 billion in 2019, up $2.7 billion from 2018 level. This additional spending includes $600 million of new technology investments and $1.6 billion for marketing, front-office hiring, new branches and a new headquarters building.
  2. Like all other banks, JPMorgan is facing difficulties in expanding mortgage business given the rise in competition and decline in home-buying appetite. Gordon Smith, CEO of Consumer & Community Banking, said “It is a tough time to be in the mortgage business.”
  3. Net charge-offs are expected to be $5.5 billion in 2019.
  4. Trading revenues in first-quarter 2019 are expected to fall in the "high teens" percentage, following an unusually strong quarter a year ago. Decline in the currencies and emerging markets units are expected to be primary reasons for the decrease.
  5. JPMorgan lowered medium-term profitability targets for its investment bank and asset-management divisions as each required more capital in 2019. The bank now targets ROE of 18% for investment bank and 25% for asset management unit.

Our Take

JPMorgan remains well positioned for growth driven by several ongoing initiatives. However, economic slowdown will have an adverse impact on its financials.

Shares of this Zacks Rank #3 (Hold) company have risen 8.7% so far this year after a disastrous performance in 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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