A combination of scale, scope, and solid execution justifies a premium valuation for JPMorgan Chase.
By Jim Sinegal | 07-14-17 | 09:46 AM | Email Article

Despite a fall-off in typically volatile trading revenue over the past three months, narrow-moat  JPMorgan Chase managed to increase both core loans and deposit balances at a high-single-digit rate over the past year, while noninterest expenses expanded at a 6% rate.

Jim Sinegal is a senior equity analyst for Morningstar.

The company’s 14% return on tangible common equity was within management’s through-the-cycle target range, and the bank’s 1.1% return on assets represents its best performance in several quarters. We plan to maintain our fair value estimate, and believe a combination of scale, scope, and solid execution justifies a 56% premium to the bank’s $53 tangible book value.

Interest-rate movements are beginning to benefit the bank, and management expects 2017 net interest income to rise by about $4 billion from last year’s $46 billion total. These figures are in line with our expectations. We believe two factors will mute the effects of rising rates on the bank’s cost of funding. First, banks are not starved for deposits, so competitors are unlikely to aggressively raise rates in order to win business. Second, we think retail depositors may be hesitant to lock in relatively low rates in an environment of increasing rates.

CFO Marianne Lake also commented on the potential effects of the Federal Reserve shrinking its balance sheet over the next several years. According to management, such actions will have a manageable effect on the company’s deposit balances, and we see little reason to disagree.

JPMorgan’s card income fell by 15% during the year, in part because of the aggressive rollout of the new high-end card products. JPMorgan appears to be using the card business to acquire customers in hopes of deepening relationships via other products in the future. Despite competitors’ troubles with cross-selling practices in recent months, we think the ability to extend relationships across multiple products raises switching costs and should benefit diversified banks over time relative to monoline peers.

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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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