In a government-led deal, JPMorgan Chase (NYSE:JPM) agreed to buy loans worth $173 billion from the failed First Republic Bank (FRC), along with $30 billion in securities and $92 billion in deposits. The deal expanded JPMorgan’s balance sheet, making Wall Street’s largest bank even bigger. Additionally, the deal impressed investors, as evidenced by the stock’s 2% gain yesterday.
The main advantage of this transaction, aside from the expansion of the balance sheet, is JPMorgan’s access to First Republic’s wealthy clientele. This is expected to support the further expansion of JPMorgan’s Wealth business.
As an added bonus, JPMorgan entered into a loss-sharing agreement regarding the purchased single-family, residential, and commercial loans with the Federal Deposit Insurance Corp. (FDIC). The agreement would secure JPMorgan’s books from any damage caused by the problematic loans made by the First Republic. Additionally, the bank will receive $50 billion in fixed-rate term financing over five years.
Overall, JPMorgan expects to realize a one-time gain of $2.6 billion and incur $2 billion in restructuring costs over the next 18 months. Furthermore, the acquired business will be overseen by the co-leaders of JPMorgan’s Consumer and Community Banking unit, Marianne Lake and Jennifer Piepszak.
It is noteworthy that JPMorgan outraced other bidders, including Fifth Third (FITB), PNC Financial (PNC), and Citizens Financial (CFG). This is because JPMorgan had strong financial standing and was able to keep costs for the Federal Deposit Insurance Fund to a minimum.
What is JPM’s Price Target?
Following yesterday’s news of the FRC acquisition, two analysts rated JPM stock a Buy. Among them, Odeon Capital analyst Richard Bove upgraded JPM stock’s rating to Buy from Hold and maintained a price target of $153.60. Bove believes that the deal will drive JPMorgan’s performance in the long term.
In addition, the Street is bullish on the stock. JPMorgan has a Strong Buy consensus rating based on 14 Buys and four Holds. The average JPM stock price target of $160.53 implies 13.7% upside potential from the current level.
