We have reiterated our long-term Neutral recommendation on
JPMorgan Chase & Co.
), based on strong fundamentals and steady performance by all its
business segments. Further, maintaining its track record of
delivering positive earnings surprises, JPMorgan substantially
outpaced the Zacks Consensus Estimate in the third quarter.
Results largely benefited from improved revenue and lower
provision for credit losses, marginally offset by still high
JPMorgan is an attractive option for investors seeking both
growth and income due to its capital deployment activities. After
reviewing the company's capital plan, in November 2012, the
Federal Reserve allowed the company to resume its share
repurchase program in the first quarter of 2013.
The need to resubmit the capital plan arose due to the huge
trading loss in its chief investment office (CIO) division in
May, following which, the company temporarily suspended its share
repurchase program. Moreover, earlier in March, following the
release of the Fed's stress test results, JPMorgan received
approval to hike its quarterly dividend by 20% to $0.30 per
share. Since then, the company has maintained the same dividend
Further, we believe that the main reason behind JPMorgan's robust
earnings stability amidst the ongoing economic recovery lies in
its business diversification. The spread of its portfolio may
prove to be as much of a positive during the recovery as it was
during the downturn.
The company will also be able to take advantage of its strong
deposit base once interest rates rise. Despite the overall
sluggish economic environment, the company's total deposits
surged 4% from the prior-year period to $1.14 trillion in the
first nine months of 2012.
Moreover, though the Federal Reserve's requirement of maintaining
higher capital cushions is expected to significantly impact the
lending ability of major banks like
Bank of America Corporation
), JPMorgan is expected to comfortably deal with the challenge as
it is in a relatively good shape from a capital perspective due
to its earnings power. We expect the company to continue building
capital over the next couple of years, paving the way for a
better financial standing.
On the flip side, JPMorgan's top-line growth is expected to be
sluggish in the upcoming quarters owing to weak trading revenue
and net interest margin (NIM) contraction. Also, the pressure on
NIM could put its traditional banking businesses at stake.
Despite an expected interest expense savings as a result of
redemption of trust preferred securities this year and the next,
management anticipates the downward pressure on NIM to continue.
Further, JPMorgan's profitability is expected to be negatively
impacted by the financial reform law due to increased costs and
fee restrictions. Additionally, in November 2012, the Financial
Stability Board indicated that the company would be required to
hold an additional 2.5% of Tier 1 common equity as a Globally
Systemically Important Institution (SIFI) under the Basel
Committee's methodology. In the mid-term, stricter capital
requirement is expected to restrict JPMorgan's flexibility with
respect to its business investments to an extent.
Currently, JPMorgan retains a Zacks #2 Rank, which translates
into a short-term Buy rating.
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