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JPMorgan Chase's Strong Q2 Performance and Weaker Outlook

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Part 4
JPMorgan Chase's Strong Q2 Performance and Weaker Outlook PART 4 OF 8

Why JPMorgan Chase Could See Revaluations on Its Outlook

Revaluations

JPMorgan Chase’s (JPM) stock has generated a return of 6.4% over six months and 49.2% over the past year, reflecting high growth and stable performance. The bank has expanded its business on the back of credit expansion, higher net interest margins, investment banking activity, trading activity up to 1Q17, its credit card business, and its asset management business. In 2Q17, JPM managed a return on equity (or RoE) of 12% and a return on total capital employed (or RoCE) of 14%—both up 1% compared to 1Q17. However, the weaker outlook for upcoming quarters could invite revaluations in the banking space (XLF).

Why JPMorgan Chase Could See Revaluations on Its Outlook

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In 2017, JPM expects net interest income to grow by $4 billion and adjusted expenses to be ~$58 billion on a year-over-year basis, reflecting stable interest income and margins. The interest income growth is expected on the back of 8% expected loan growth with an expected net charge-offs in the range of plus or minus $5 billion.

Valuations

Commercial banks and institutions (XLF) are facing a negative valuation push from a weaker outlook and positive push from the introduction of the Choice Act to tweak the existing Dodd-Frank Act. The act, if passed by the senate, will allow banks to operate with fewer regulations. JPMorgan Chase is trading at a premium valuation of 1.41x compared to the industry average of 1.15x. The bank has commanded a premium mainly due to its risk management policies, credit business, credit card, trading activity, and asset management businesses.

Its competitors are trading at the following price-to-book multiples.

  • Bank of America (BAC): 0.99x
  • Citigroup (C): 0.87x
  • Wells Fargo (WFC): 1.52x

Commercial banks could see subdued growth in 2H17 as equities’ valuations have reached historic highs and credit growth is expected to slow along with falling trading activity.

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