Amid high levels of inflation, rising interest rates, growing concerns of a recession, and Russia's invasion of Ukraine, the S&P 500 has fallen more than 16% this year, returning a lot of the gains it made in 2021. JPMorgan Chase (JPM 1.52%), the largest bank by assets in the U.S., has fared worse, with its stock down roughly 18.5% this year. But recently, JPMorgan raised its full-year outlook and now believes it can generate higher returns in 2022 than it initially thought a few months ago. Has the stock been oversold? Let's take a look.
Boosting revenue and profitability outlook
One of the main sources of revenue at most banks is net interest income (NII), which is the profits banks make on loans, securities, and cash after covering the cost of funding those assets.
Image source: Getty Images.
Most banks are able to realize more NII when the Federal Reserve raises rates because the yields on more of their assets reprice higher than those of their liabilities such as deposits, widening their margins. At the beginning of this year, most analysts and experts didn't expect the Fed to be as aggressive as it's been with rate hikes. The Fed has now raised its benchmark overnight lending rate, or the federal funds rate, to a range of 0.75% to 1%. The market currently expects rate hikes at all of the Fed's remaining meetings in 2022, including half-point hikes in June and July. As a result, JPMorgan and most other asset-sensitive banks are significantly raising their NII forecasts.
Image source: JPMorgan Chase.
On its first-quarter earnings call in April, JPMorgan Chase management guided for NII of $53 billion, excluding NII from capital markets. Now, JPMorgan is guiding for $56 billion based on several assumptions. The bank expects the federal funds rate upper bound range to reach 3% by year-end, which assumes three full half-point hikes and two 0.25% hikes at the Fed's remaining five meetings this year. JPMorgan Chase's assumptions also assume high single-digit percentage loan growth from 2021 and "modest securities deployment."
Based on this guidance, management is also expecting the bank to reach an annual NII run rate of $66 billion in the fourth quarter. CFO Jeremy Barnum at JPMorgan's investor day said this number "serves as a good launch point heading into next year." He also said that it's unclear what 2023 will look like but that there could be upside to the $66 billion of NII in a "benign" environment.
NYSE: JPM
Key Data Points
Management also expects the expense outlook to remain the same at $77 billion for the year and for the bank to see tailwinds in its trading businesses due to all the market volatility. COO Daniel Pinto said capital markets revenue is expected to grow 15% to 20% on a year-over-year basis in the second quarter of this year. Putting all of this together, JPMorgan Chase's CEO Jamie Dimon said there is a "very good chance" the bank can generate a 17% return on tangible common equity (ROTCE) this year, its medium-term profitability goal that it initially didn't expect to hit. ROTCE is a bank's return on shareholder capital minus goodwill, intangible assets, and preferred stock dividends.
Is it a buy now?
The increased guidance is great news for shareholders this year, and if the economy can stay strong, 2023 could be much better. Despite market volatility and economic uncertainty, JPMorgan Chase management said in its presentation that "the U.S. economy remains fundamentally strong, despite recent mixed data." The bank also added that the "strong consumer and wholesale balance sheets will delay normalization [of loan losses] past 2022." There is still a lot of uncertainty out there, but I think the stock has definitely been oversold and is now a buy, given the improved guidance in what has been a difficult environment for many stocks.
