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Goodbye Accommodating Fed, JPMorgan Could Rise Sharply
Stock Analysis & Ideas

Goodbye Accommodating Fed, JPMorgan Could Rise Sharply

Bucking the trend in the financial services sector, shares of JPMorgan Chase & Co. (JPM) are down approximately 3% year-to-date.

The stock’s performance is being weighed down by concerns that the American financial services giant could face higher-than-expected expenses. Added to this is the idea that credit use is normalizing too quickly.

However, I believe that following the monetary tightening announced by the U.S. Federal Reserve in December, the fall in inflation could support consumption and slower credit normalization.

Firmwide profitability should benefit from higher interest rates, increasing the likelihood that JPMorgan will exceed the average tangible common shareholder equity (ROTCE) target of 17% as early as this year.

Thus, I am bullish on this stock.

Headquartered in New York, JPMorgan is a global diversified financial services firm serving millions of clients in the United States and several large corporate, institutional, and government clients around the world.

JPMorgan Chase & Co is a leader in investment banking, consumer and small business financial services, and commercial banking. The company also offers transaction processing and wealth management.

Q4 Earnings

In the fourth quarter of 2021, JPMorgan Chase reported GAAP earnings per diluted share of $3.33, beating the median consensus estimate by $0.33.

Diluted GAAP earnings per share declined 12.14% year-over-year, despite a net release of $1.8 billion in reserves, coupled with increased capital market activity and increased lending.

Total revenue was $29.3 billion, reflecting a 3% year-over-year decline and missing the analysts’ average forecast by $520 million.

Provision for credit losses turned into a benefit of $1.3 billion as the macroeconomic environment remained resilient. However, it declined 13.34% sequentially.

In addition, the company said that its return on tangible common equity was 19% in the last quarter of 2021, compared to 22% in the previous quarter, and 24% in the same quarter last year.

The company released some forecasts for the full-year 2022, according to which net interest income excluding corporate and investment banking (CIB) markets will be around $50 billion, up 12.4% year-over-year.

It also expects adjusted noninterest expenses to be higher in 2022 at about $77 billion, compared to nearly $71 billion for all of 2021.

JPMorgan Chase is forecasting a lower return on average tangible common shareholder equity (ROTCE) of 17% over the medium term due to some near-term headwinds coupled with higher expenses.

Outlook

The rate hike should boost JP Morgan Chase’s profitability. The Federal Reserve’s goal is to reduce inflation and bring it back to the 2% target.

This rapid increase in the prices of goods and services, which will force families to resort heavily to consumer credit as long as interest rates remain low, was mainly caused by a rise in commodity prices, including oil and gas.

With this situation exacerbated by the crisis in Ukraine and OPEC’s reluctance to inject additional barrels of oil into the market, it will take time for the Federal Reserve to reach its target.

Many large multinationals that produce oil and gas and other commodities are now benefiting from the energy boom and the rise in the prices of other commodities. At this point, it is possible that many of these operators, and generally all companies operating in capital-intensive industries, will increase their loan requests to finance investments as their profitability has improved.

As interest rates gradually rise over the next months, the upside potential for JP Morgan Chase is incredible, with nearly 90% of its loans going to large corporations and other businesses around the world.

It is also plausible to expect fewer non-performing loans going forward. So, the company could end up devoting additional resources to compensating shareholders that it would otherwise allocate to piling up provisions for bad debts.

Wall Street’s Take

In the past three months, 18 Wall Street analysts have issued a 12-month price target for JPM. The company has a Moderate Buy consensus rating, based on 10 Buys, seven Holds, and one Sell.

The average JPMorgan Chase & Co price target is $177.72, implying 12.7% upside potential.

Conclusion

The expected shift from the Federal Reserve’s accommodative policy in favor of tightening monetary policy should have benefits across the board for JP Morgan Chase and other banking giants.

The company could achieve a target ROTCE of more than 17% and increase the dividend, which is currently $1 per share and is paid quarterly. These two factors could make the stock price rise rapidly.

Given the growth outlook, JP Morgan Chase looks like a bargain.

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