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Morningstar | JPMorgan Continues Strong Results in 3Q; We Are Increasing Our FVE

Narrow-moat JPMorgan Chase reported solid third-quarter results with net income on a reported basis increasing 24% to $8.4 billion, or $2.34 per diluted share. This was largely in line with our overall thesis for the banking industry in general, and JPMorgan specifically. We expected high double-digit earnings growth year over year, driven by rising interest rates, tax reform, and a strong U.S. economy. JPMorgan generated a return on tangible common equity of 17% during the quarter, largely matching last quarter’s performance. This is already on par with management’s long-term goal for the bank, which signals to us that JPMorgan is and has been firing on all cylinders and is much closer to full capacity than some of its competitors. After making several changes to our projections, including adjusting our cost of equity for the bank to 9.5%, down from 11%, we are increasing our fair value estimate to $118 per share, up from $106.

While worries seemed to originally be about a flattening yield curve, it is interesting to us that bank stocks have taken such a hit with the yield curve finally steepening. Management stated that a rising 10-year Treasury yield is indeed positive for their earnings, as we would have expected. A steepening yield curve will tend to increase net interest margins as securities yields rise, as well as yields on longer duration loans, such as mortgages. Further, to the extent that the rising 10-year yield represents the market’s view that the economy is likely to be stronger in the future, that would also be a positive for banks.

JPMorgan continued to increase loans modestly, with management mentioning that competition remains stiff within the commercial real estate space, and that nonbanks continue to gain share in certain areas of the market, often through being more aggressive on pricing and/or structure. This is largely what we would expect, given the friendliness of the current credit environment. We can appreciate that the regulated banking industry would hopefully lose some share when the cycle is at its most aggressive. On that same note, credit costs remained below normal for JPMorgan, with charge-offs on almost all portfolios coming in below historical norms.

The bank continued to increase credit card sales and merchant processing volumes year over year, even as headwinds within the mortgage business continued. JPMorgan maintained its top spot for I-banking fees year to date, and while markets and investor services revenue declined quarter over quarter, last quarter was particularly strong. Revenue for these segments was still up year over year. Assets under management were up 7% year over year, as were expenses within the asset and wealth management segment as investments in advisors and technology continued. Overall, results have been largely in line with management’s expectations, JPMorgan continues to gain and/or maintain share in key areas, and the bank has the ability to invest some of the highest dollar amounts in technology. We would expect similar results in the fourth quarter.