JPMorgan Chase & Co (JPM) is trading at $153,51 at the time of writing (17/03/2021). This is after the bank stock has experienced an impressive 84% run up since the March 2020 lows. However, does the stock still offer a good buying opportunity or is it starting to look a little over-valued?
Unlike competitor banks JPMorgan managed to avoid major losses in the 2008 financial crisis. They have used this head start to focus on their retail lending, which has paid off, they are now the largest bank in the US with $3 trillion in assets. The flipside of this is that when a new economic crisis blows in, think Covid-19, JPMorgan has a greater exposure to increasing loan provisions and bed debts as American businesses and consumers alike are affected by lockdowns. Despite the vaccine rollout the impairment charges are not over yet, as payment relief programs that the bank has offered will effectively delay the delinquency of many customers.
In 2020, they have set aside $17,5 billion for loans that might go bad, of that, $12.3 billion was extra reserves for losses in its consumer bank, mainly on credit cards. Another $896 million was for advances to companies that may go under. I expect these numbers to continue to rise in the coming months despite already being the JPMorgan’s highest provisions in at least a decade.
The second problem JPMorgan is facing is that central banks tend to cut interest rates which depresses lending margins. Their net interest income, which is the interest earned from lending activities has shrunk YoY by 7,6%, down from $14,5bn to $13,4bn. On the positive side the bank has made more from trading in volatile markets with trading revenue climbing to $7.2 billion, and deposits have grown by 23%, as consumers rush to put their money in the strongest banks, which in this case is JP Morgan. On top of this, the corporate and investment banking division delivered an impressive 82% increase in net income to $5,3bn for the last quarter driven by fees.
The result of the above is that JPMorgan’s 2020 net income fell by 19,9% to $28,9bn and earnings per share was reported at $8,8 versus the consensus of $9,1. While the bank has shown good resilience through Covid-19 and continues to be a financially sound company the stock is currently trading at a high PE of $17,72 and PEG of $2,96, while its pre-pandemic PE was $12 it doesn’t appear to have much further to run. It is for this reason we expect JPMorgan to offer an upside of 9% with a price target of $171. This share is a buy if you are looking for stable returns into the future and are at a buy at $171 offering an upside of 9%. Considering the above the stock likely doesn’t have much higher to run
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