J.P. Morgan’s Valuations High amid Steady Growth Expectations



Strong track record

JPMorgan Chase’s (JPM) stock has given a compound annual growth rate (or CAGR) return of 20.2% over the past five years. The stock has risen 24.4% in the past six months and 41.4% in the past year, reflecting a consistent and strong performance. The bank has expanded its book on the back of loan book expansion, credit card business, and trading and investment banking activity.

In 2Q17, JPM is expected to rise 6.5% on a year-over-year basis, reflecting subdued growth due to a marginal rise in broad markets (SPX-INDEX) (SPY) and business expansion driving credit growth. In 2017, JPM is expected to post EPS (earnings per share) of $6.70 with an implied PE (price-to-earnings) ratio of 11.34x.

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Premium valuations

Commercial banks (XLF) have seen their valuations rise in the recent quarters on higher interest income and net interest margins backed by higher interest rates. JPM is currently trading at a premium valuation of 1.3x as compared to the industry average of 1.1x. The bank has commanded a premium mainly due to its strong risk policies, expanding loan book, credit card, and asset management business.

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

  • Bank of America (BAC): 0.98x
  • Citigroup (C): 0.79x
  • Wells Fargo (WFC): 1.53x

Commercial banks along with other institutions may continue to see subdued growth in the first half of 2017 as valuations have reached historic highs and an expectation of a slowdown in terms of credit growth.

In 1Q17, JPM managed a return on equity of 11% and a return on total capital employed of 13%.


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