J.P. Morgan: Can This Big-Bank Maintain Best-in-Breed Status?
J.P. Morgan (JPM) announced its first quarter earnings this week, starting off 2021 with a bang, beating analyst estimates on both the top and bottom lines. JPM’s Q1 revenue came in at $32.3 billion, representing 14.3% year-over-year growth.
During the quarter, the company saw net interest income fall $1.6 billion due to lower rates, but its non-interest revenues rose by $5.7 billion, representing 39% growth. The company’s GAAP earnings-per-share came in at $4.50, beating analyst estimates by $1.38/share. The firm saw its book value per share and its tangible book value per share rise to $82.31 and $66.56, representing 8% and 10% year-over-year growth, respectively. The company returned $7.1 billion to shareholders during Q1; $2.8 billion of which came in the form of a shareholder dividend and $4.3 billion came in the form of net share repurchases.
All of these results looked solid. And in a recent article, 5-star Nobias analyst, Richard Saintvilus, touched upon JPM’s best-in-breed nature, saying, “Without question, JPMorgan has established a well-deserved reputation as being the best-executing bank not only among its peer group, but as one of the best-run banks in the world.” And, with this in mind, he believes that the bank's strong performance shouldn’t come as a surprise to investors. Saintvilus notes that due to “ongoing investments in areas like technology and marketing” shares of J.P. Morgan has outperformed many of their peers, both over the short-term and over the long-term as well.
Looking at the Financial Sector SPDR ETF (XLF) we see that over the last year, the financials have posted 66.4% gains. Over the last 6 months, financials have risen by 41.6%. And, year-to-date, the financial sector is up 20.08%. Over these same 1-year, 6-month, and year-to-date periods, JPM shares are up 75.5%, 51%, and 20.64%, respectively. Looking ahead, it appears that this strong performance may not be over with. The ongoing stimulus being provided by the U.S. government and the Federal Reserve points towards a strong economic environment that bodes well for the big banks. Saintvilus touched upon this in his recent piece, saying, “Aside from progress on the vaccine front, the reopening of the U.S. economy is bullish for lending. What’s more, the median GDP growth forecast for second quarter is 9.3%, compared to 5.8% rise in the first quarter.”
Without a doubt, JPM is an economically sensitive stock. To come, this represents upside, especially as cyclical are rallying. To others, it represents outsized risk, due to the downside potential of a financial name during a potential recession. However, such strong gross domestic product growth should allay such fears.
The strong GDP forecast that Saintvilus highlights above has provided solace to investors looking to increase their exposure to cyclical assets like the fiancnials, which is why JPM shares (and the financial sector at large) have experienced such a strong rally throughout 2021 thus far. What’s more, while the Federal Reserve continues to sing its dovish tune, there is a rising chorus of analysts who believe that ongoing stimulus and the strong economic recovery are going to result in rising interest rates.
The Fed has remained staunch in its stance regarding no rate increases through 2023; however, even the whiff of normalization when it comes to interest rates gets bank investors excited because of the prospects for higher net interest margin to bolster the bottom-lines of these financial institutions.
But, rising rates aren’t the only thing that could lead to bottom-line growth for J.P. Morgan. In a recent article, 4-star Nobias analyst, Bram Berkowitz, who writes for The Motley Fool, highlighted several interesting hires that J.P. Morgan made in its venture capital banking group.
It appears that JPM management is taken steps to reduce its cyclical exposure, hoping to take the lessons learned from the COVID-19 pandemic period and enhance aspects of its business model that do not rely so heavily on the health of the broader economy. Berkowitz said, “While banks make new announcements all the time about launching different business lines and hiring new bankers, this recent announcement by JPMorgan is a bigger deal in my opinion because tech banking is such a great business and also such a niche business. This is also a unit that JPMorgan investors should pay attention to, because the bigger and more material to earnings it gets, the better it could be for the bank.” Berkowitz notes that venture capital lending “can also be very risky as start-ups have a high failure rate. However, if done correctly, tech banking can be tremendously profitable.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
During the COVID-19 recession, when traditional lending dried up, venture capital investing remained very strong. Due to the continued disruption and secular growth prospects of the technology sector overall, demand for funds in the tech space is expected to remain high moving forward, throughout a wide variety of potential economic environments. This is what makes the venture capital investments by JPM so appealing to investors. But, the bullish nature of venture capital investing doesn’t stop there. Because of the risky nature of venture capital lending, banks who provide credit are oftentimes able to receive incentives, outside of the interest rate attached to their loans, such as warrants that provide shares in the event of an initial public offering. Berkowitz says, “For instance, it recently came to light that Silicon Valley Bank, which agreed to bank the cryptocurrency exchange Coinbase in 2014, has an outstanding warrant in Coinbase's upcoming IPO. The warrant gives the bank the ability to buy more than 400,000 shares of Class B common stock at just over $1 per share, making that warrant worth as much as potentially $152 million.”
Lastly, Berkowitz highlights the potential for increased IPO underwriting opportunities, as well as numerous situations where relationships with successful tech-founders can lead to cross selling of other products, such as “jumbo mortgages” or “wealth management products”, all of which have the potential to incrementally grow the bank’s top and bottom-lines moving forward. In conclusion, he says, “Given the fact that JPMorgan excels in nearly all aspects of banking, I have no doubt it can build up its tech division to be a strong performer as well.”
Disclosure: Nicholas Ward has no positions in any company listed in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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