JPMorgan JPM 7.21%
Chase told the market what he needed to hear.
After posting first-quarter earnings last month, even as the Federal Reserve made it more serious, the bank raised its target to 56 billion for its volatile market unit during Monday’s Investors Day presentation. He also sees a path, based on what he expects in the fourth quarter, to a future annual rate of about $ 66 billion.
This alone is likely to reassure investors that lenders will not miss out on the benefits of rising rates, as worries about credit growth rates and deposit competition will not destroy this major advantage.
Shares of banks on Monday as a whole rose, and shares of JPMorgan on the way to its best day since 2020 with growth of 7%. The Nasdaq Bank’s KBW index rose almost 5%, almost three times the rebound of the broader S&P 500.
However, investors should not go too far ahead. Even with this expectation of interest income, JPMorgan has not changed its medium-term target of 17% return on tangible total capital, a key indicator of the bank’s profitability.
CEO Jamie Diman said there is a very good chance that the bank will reach that level of 17% this year and he could reach that level next year in unpleasant conditions. According to FactSet, the multiplicity of price and material book of the bank is now a little more than 1.8 times. It traded more than twice before the pandemic and reached 2.5 times last year.
Whether this means that the shares are discounted depends on a broader outlook for earnings, taking into account some macro-factors that are not partially controlled by banks. First, Mr. Diman noted that the bank now “over-earns” on loans, losing about $ 3 billion annually on foreclosures, or about half of what he said could be a normalized level. The bank expects this to eventually return to normal, although it does not expect a quick return. It says it may take closer to the end of next year to reach a net recovery rate before the pandemic. However, under current accounting rules, banks may have to adjust their loan loss provisions earlier, in part based on worse macroeconomic scenarios.
Then the regulatory capital requirements increase, which affect the part of the denominator of return on equity. The bank said it expects to achieve a higher minimum capital ratio from early 2024. While it can achieve this through revenue growth – and so it won’t need to raise capital and dilute shareholders – it can limit the cash available to buy back shares, which will usually raise the book value per share. This is a factor of multiple book prices.
On Monday, the bank also spent much of its time explaining the return on its spending on investments in industries such as cloud computing and travel services. But in this scary market, investors may not be in the mood to pay for the potential. Such a cautious, cost-conscious could take into account the largely symbolic, optional rejection of the bank’s compensation plan for Mr. Diamond and other top managers during a shareholder vote last week.
So after Monday investors can calm down. But don’t expect them to get excited yet.
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