On Jun 27, 2016, we issued an updated research report on JPMorgan Chase & Co. JPM. Streamlining operations and hike in interest rates by Federal Reserve will drive top-line growth. However, energy exposure will remain an overhang in the near term, with the expectations of further reserve build.
Synergies from business diversification, improving retail banking performance and cost-containment efforts will also help JPMorgan improve profitability. Moreover, the company’s top line will benefit from gradually rising interest rates.
Also, JPMorgan remains focused on acquiring the industry's best deposit franchise and enhancing its loan portfolio. Management anticipates continued loan and deposit growth in the quarters ahead.
Further, JPMorgan, with 8.3% CET1 capital ratio under a severely adverse scenario, fared well compared with the prior-year’s test. This raises the chances of the Fed’s approval of its capital plan which is expected to include share repurchases and dividend hike.
However, JPMorgan is witnessing pressure from oil price volatility and fall in other commodity prices. If the present trend in these two sectors persists, management believes that there will be a rise in reserves in 2016. Also, given the stress in the energy sector and loan growth, the company anticipates net charge-offs to be approximately $4.75 billion in 2016.
Further, JPMorgan’s non-interest income is expected to remain muted in the quarters ahead owing to weak mortgage banking, trading and investment banking revenues. Global equity market turmoil and stressed oil prices are likely to act as headwinds. Also, with the enforcement of new banking regulations, additional pressure on fee income is expected in the near term.
Notably, over the last 30 days, the Zacks Consensus Estimate remained stable at $5.64 for 2016, declining 1 cent to $6.31 for 2017.
JPMorgan currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Some better-ranked finance stocks include Central Pacific Financial Corp. CPF, Heritage Commerce Corp. HTBK and First Horizon National Corporation FHN. All these stocks hold a Zacks Rank #2 (Buy).
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