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What Lies Ahead for JPMorgan (JPM) Amid Improving Economy?

Zacks Equity Research

At annual Investors Day conference, JPMorgan Chase & Co.’s JPM management discussed the current macroeconomic backdrop and the path the company is taking to enhance profitability over the medium term. Also, the company provided first quarter and 2017 guidance.

The first and foremost thing that comes to every investor’s mind is the improving rate scenario and how banks will capitalize on the same. JPMorgan is well positioned for raising rates, which will drive its net interest income.

Further, JPMorgan intends to invest significantly in its credit card business and become more technologically focused to remain competitive amid growing customer needs.

Notably, JPMorgan affirmed its long term-targets of cost-to-revenue ratio of 55% (despite continued investments in franchise), return on tangible common equity (ROTCE) of nearly 15% and net payout ratio of 55–75%.

Nonetheless, for value investors, the company has something to cheer about. Per a presentation, JPMorgan may return approximately 120% of net income to the shareholders over the medium term. This is up from 65% target set by the company last year.

Further, JPMorgan expects net income to be nearly $30 billion over the medium term, while keeping the return on equity target unchanged at 20%.

First Quarter and 2017 Guidance

Net Interest Income: In first-quarter 2017, JPMorgan’s net interest income (NII) will modestly benefit from Dec 2016 rate hike. For 2017, NII will increase $3 billion, benefiting from loan growth and higher rates.

Average core loan growth is expected to be around 10% in 2017 that will be funded from strong deposit balance.

Non-interest income: Management projects market revenues to increase slightly year over year in the first quarter, based on market conditions. Further, investment banking is anticipated to remain stable sequentially depending on timing of deal closures.

For 2017, mortgage revenues are expected to fall roughly $700 million, mainly owing to margin compression in a smaller mortgage market and continued run-off of the Servicing portfolio. Moreover, card services income will decline $600 million, largely reflecting amortization of premiums on strong new product originations.

Operating Expenses: JPMorgan expects expenses (excluding legal charges) to be around $58 million in 2017.

Credit Quality: JPMorgan expects net charge-off (NCOs) rate in 2017 to be relatively flat across all businesses except Cards (up due to continued loan growth and the seasoning of newer vintages) and Corporate and Investment Bank CIB (down on absence of energy related NCOs). Notably, NCOs are projected to be around $5 billion, driven by loan growth.

Consumer allowance for credit losses will likely increase $300 million this year, owing to growth across businesses, partly offset by allowance releases for the residential real estate portfolio. Further, wholesale allowance for credit losses (excluding energy and metals & mining portfolios) is expected to rise marginally. Management expects potential reserve releases in energy portfolio in the upcoming quarters, reflecting stabilizing oil prices.  

Road Ahead

Management remains bullish about the U.S. economic growth. JPMorgan CEO, Jamie Dimon said, “The future is very bright.” The company believes that it will fare even better in case the promises made by the President Donald Trump – changes in corporate tax structure, increased infrastructure spending and lesser banking regulations – gets implemented.

JPMorgan’s shares have risen 29.1% since the election results, marginally above the Zacks categorized Major Regional Banks industry’s gain of 28.2%. Given the upbeat outlook and improving operating environment, the company has plenty of upside left.

Currently, JPMorgan carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other major banking stocks carrying the same Zacks Rank include Bank of America Corp. BAC, U.S. Bancorp USB and The PNC Financial Services Group, Inc. PNC.

BofA has witnessed an upward earnings estimate revision of 6.1% for the current year over the past 60 days. Also, its share price is up 14.8%, over the last three months.

U.S. Bancorp earnings estimates have been revised upward by 2.4% for the current year in the past 60 days. Also over the past three months, its share price increased 9.2%.

PNC Financial recorded an upward earnings estimate revision of 4.2% for the current year in the past 60 days. Also, its share price has seen a 13% rise over the last three months.

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