We continue to maintain our long-term “Neutral” recommendation on JPMorgan Chase & Co. (JPM). Although we anticipate continued synergies from a reduction in reserves for future losses, business diversification and strong capital deployment activity, the effect of the foreclosure mess, along with legal and regulatory challenges, and the pressure on net interest margin (NIM) due to a low interest rate environment will drag down future earnings.
However, we believe that with a rebound in the global equity and debt markets, JPMorgan’s equity-centric activities will likely bolster results and boost the bottom line going forward.
Additionally, JPMorgan is on track with its global expansion plans. The company’s recruitment of a large number of talented employees in Asia and other emerging markets would enhance its asset management business.
Also, JPMorgan’s credit quality continues to improve steadily. We are impressed with the gradual betterment in delinquency trends across almost all the consumer-lending areas. We anticipate these trends to continue, thereby providing room for further earnings enhancement.
Furthermore, JPMorgan’s recent decision to hike its quarterly dividend five fold to $0.25 per share after the Federal Reserve’s clearance, testifies to the company’s strong capital position. The company had also announced a $15 billion multi-year stock repurchase program. Out of this, up to $8 billion of common stock buyback has been approved for 2011. Thus, considering its enhanced dividend-yielding nature and share repurchase program, JPMorgan could be attractive for value investors.
On the flip side, JPMorgan’s top line is expected to slow down as NIM continues to trend lower. Further, there would be an added pressure on the revenue (weak fee and lower loan growth) owing to various new banking regulations. Also, a low interest rate environment will add to the pressure on NIM through 2011.
Moreover, JPMorgan will face a sluggish growth in its traditional banking revenue as a result of the present foreclosure mess and implementation of various financial regulations.
Furthermore, JPMorgan’s profitability will be affected by the financial reform law due to increased costs and fee restrictions. Also, along with other large U.S. banks (with assets of $50 billion or more), the company will be subject to an additional surcharge to meet the Basel III requirements. These would lead to lower flexibility with respect to business investments in the mid-term.
JPMorgan currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, Bank of America Corporation (BAC), one of the company’s closest peers, retains a Zacks # 3 Rank (short-term ‘Hold’ rating).
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