There was very little to dislike about JPMorgan Chase's (JPM +0.10%) second-quarter earnings report.
The largest bank in the U.S. by assets reported nearly $14.5 billion in profits on revenue of $41.3 billion, blowing past consensus estimates. Profits grew 67% year over year, while revenue jumped 34%.
JPMorgan Chase also significantly raised its full-year guidance, giving investors everything they could want and then some. But with the shares already trading at a premium valuation, can the stock keep rising from here? Let's take a look.
No chinks in JPMorgan Chase's armor
Since the Great Recession, JPMorgan Chase has been considered a stronghold in the banking sector, consistently generating resilient earnings quarter after quarter, regardless of the economic environment.
Image source: Getty Images.
Now, several months after a banking crisis, JPMorgan just did it again. Higher interest rates continued to bolster profits at the country's largest bank, with net interest income (NII) -- the money banks make on loans and securities after funding those assets -- surging to nearly $21.8 billion in Q2.
Funding costs seemed to fare better than expected as well, with the bank's total funding costs in Q2 rising 40 basis points (0.40%) -- a decent leg up but less than last quarter, which is encouraging. JPMorgan CFO Jeremy Barnum said there was lower deposit repricing on both the wholesale and consumer fronts than management had expected.
The bank also raised its full-year guidance, projecting that NII this year would come in at $87 billion, up a whopping $6 billion from the forecast provided in the first quarter.
However, Barnum cautioned analysts that significant uncertainty remained and that the NII run rate would not be this high under normal circumstances. Meanwhile, the bank also expects credit quality to remain benign. Credit card net charge-offs, or the projected loan loss rate, are expected to end the year at 2.6%. JPMorgan CEO Jamie Dimon said a normalized rate for credit card net charge-offs is 3.5%.
JPMorgan Chase is crushing long-term targets
A big part of the investment thesis for JPMorgan's stock is the bank's ability to generate a 17% return on tangible common equity (ROTCE) through the economic cycle, which is one of the highest in the industry and among peers.
Well, for the second quarter, JPMorgan just delivered a 25% ROTCE. Now, there was some benefit from the bank's acquisition of First Republic, but even excluding these impacts, JPMorgan's ROTCE would have been 23%, which is still superb. The bank has also likely been a net beneficiary of the banking crisis and, as Dimon pointed out, is outperforming on credit, not to mention the significantly higher interest rates.
NYSE: JPM
Key Data Points
Barnum and Dimon seemed to indicate that they still like the 17% ROTCE target, but the bank has delivered ROTCEs over 17% in nine of the last 14 quarters while coming in below 17% in only three instances, all of which occurred in 2020 during the brunt of the pandemic.
Keep in mind the bank also generated these results while consistently building capital over the years to prepare for higher capital requirements, which by their very nature compress returns.
Can JPMorgan stock keep pressing on?
JPMorgan's stock currently trades at more than 2 times its tangible book value, or net worth, which is at the top of its peer group, just slightly below Morgan Stanley. With credit expected to normalize, the possibility of a recession at some point, and incoming higher regulatory capital requirements, some may wonder if the shares have rallied too far.
But I still think the stock can be a steady compounder of growth, largely because it can keep increasing its tangible book value, which is up 15% year over year. Additionally, after doing as well as it has this year, despite the banking crisis, I would argue that JPMorgan deserves even more of a premium valuation.
In my view, JPMorgan Chase is a great way for investors to make steady capital gains with less risk. The bank's dividend is approaching a 3% annual yield as well.
