Why JPMorgan Chase Is Commanding Premium Valuations



Relative performance

JPMorgan Chase (JPM) stock has generated a return of 13.1% in the last six months and 29.0% in the last year. In comparison, the financial sector (XLF) has grown 5.1% in the last six months and 18.6% in the last year, respectively.

JPM garners a premium valuation for its strong brand, risk-management practices, relatively high credit offtake, number one ranking in investment banking, and decent performance in trading and asset management activities.

In 1Q18, JPMorgan managed a 15% return on book equity and a 19% return on capital employed, rises of 5% and 7%, sequentially. Tax cuts and higher interest spreads have helped the bank command better operating margins.

Credit offtake will be a key driver for banks amid rising rates in 2018. Given higher volatility, trading activity will likely continue to see solid growth on a year-over-year basis.

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Premium valuations

JPMorgan Chase is trading at a premium valuation of 1.75x in April 2018 compared to the industry average of 1.26x. In comparison, Wells Fargo (WFC) has seen a continued fall in its stock price and lower valuations in recent months. Overall, the banking industry is benefiting from high rates, low taxes, and fund flows toward asset management offerings.

JPMorgan’s competitors are trading at the following price-to-book multiples:

  • Citigroup (C): 1.01x
  • Bank of America (BAC): 1.25x
  • Wells Fargo (WFC): 1.37x

The overall health of the economy acts as a major driver for the growth of US banks. Credit growth, retail spending, manufacturing boosts, and equity market volatility should help banks garner new assets and lending activity over the next few quarters. Any broad fall in consumer sentiments could affect the growth of banks across their consumer banking and asset management segments.


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