JPMorgan Continues to Generate Value for Shareholders

Image Source: Hakan Dahlstrom

By Brian Nelson, CFA

JPMorgan (JPM) reported excellent third quarter results on October 11. Reported revenue of $42.7 billion and GAAP earnings per share of $4.37 both beat the consensus forecast. Credit costs were $3.1 billion, which included $2.1 billion of net charge-offs and $1 billion in net reserve build. Average loans were up 1% year-over-year, while average deposits advanced at a similar rate. For the third quarter, JPMorgan reported an ROE of 16% and ROTCE of 19%, both measures indicating nice value generation for investors.

CEO Jamie Dimon had the following to say about the quarter and current economic conditions:

The Firm reported strong underlying business and financial results in the third quarter, generating net income of $12.9 billion and an ROTCE of 19%. In the CIB, investment banking fees grew 31%, while Markets revenue was resilient, rising 8%. Payments fees grew by double-digits as investments are fueling organic growth. In CCB, we ranked #1 in U.S. retail deposits for the fourth consecutive year. Card loans increased 11%, and we saw robust acquisition of 2.5 million accounts. Finally, in AWM, asset management fees rose 15%, and long-term net inflows were a record $72 billion.

We await our regulators’ new rules on the Basel III endgame and the G-SIB surcharge as well as any adjustments to the SCB or CCAR. We believe rules can be written that promote a strong financial system without causing undue consequences for the economy, and now is an excellent time to step back and review the extensive set of existing rules – which were put in place for a good reason – to understand their impact on economic growth, the viability of both public and private markets, and secondary market liquidity. Regardless of the outcome of these rules, we have an extraordinarily strong balance sheet, evidenced by total loss-absorbing capacity of $544 billion plus cash and marketable securities of $1.5 trillion, while our riskiest assets, loans, total $1.3 trillion. On share repurchases, given that market levels are at least slightly inflated, we maintain our modest pace of buybacks, although we reserve the right to adjust this at any time.

We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse. There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history. Additionally, while inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. While we hope for the best, these events and the prevailing uncertainty demonstrate why we must be prepared for any environment.

During the third quarter, JPMorgan’s book value per share was up 15%, to $115.15, while tangible book value per share grew 18%, to $96.42. Shares of JPMorgan aren’t cheap trading at north of 1.9x book value. JPMorgan is an important bellwether for the global economy, and its third quarter results spoke of continued strength and high returns on capital. We include Financial Select SPDR (XLF) in the Best Ideas Newsletter portfolio to capture diversification benefits from the largest financial institutions. Shares of JPM yield approximately 2.3% at the time of this writing.

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