【2024.10】The most handsome boy in the banking stocks, the stock price continues to hit new highs! How do you see jpmorgan's performance?

As the largest bank stock in the current USA market cap, JPMorgan has always been highly valued. $JPMorgan (JPM.US)$ With relatively stable performance, JPMorgan's stock price has significantly outperformed the KBW bank stock index and the S&P finance index from 2018 to 2023. It has also kept pace with the S&P 500 index. In the first three quarters of this year, JPMorgan's stock price continued to soar, with an increase of 24%, slightly surpassing the 19.2% of KBW and the 20.8% increase of the S&P 500 index during the same period.

So why is JPMorgan's long-term trend so stable? We can find some answers from its earnings. Each earnings release by the company may imply a good trading or investment opportunity. Before that, investors need to understand how to interpret its earnings.

When it comes to JPMorgan's earnings, we should mainly focus on three key points: the stability of earnings, the robustness of bank risk indicators, and the consistency of shareholder returns.

1. Stability of Earnings

In general, it is difficult for bank stocks to achieve explosive growth in earnings, and earnings tend to fluctuate with economic cycles. The stability of JPMorgan's earnings is firstly reflected in revenue. From 2015 to 2023, despite significant fluctuations in the USA economy during the pandemic, its revenue has continued to grow every year, increasing from $93.5 billion in 2015 to $155 billion in 2023, a growth of about 66% over 8 years, with a compound annual growth rate of about 6.7%. Such steady growth is particularly difficult for a large bank stock.

Looking at net profit, although JPMorgan's net profit has not achieved continuous growth, each time it declines, it reaches a new high the following year, demonstrating strong resilience. Over an 8-year period, its net profit level increased from $22.4 billion in 2015 to $47.8 billion in 2023, a cumulative growth of 1.1 times, with a nearly 10% compound annual growth rate, significantly exceeding the revenue growth rate.

One of the key reasons why JPMorgan can maintain stable performance is the diversification of its business. JPMorgan's business is divided into several segments, including dominant personal and community banking, followed by corporate and investment banking, asset management, and commercial banking.

Although jpmorgan's business modules are diverse, from the perspective of revenue composition, they can be divided into two major cores: net interest income and non-interest income. The former is essentially earning the interest spread on loans, while the latter mainly includes securities trading commissions, investment banking service fees, etc. The original proportions of these two income streams were around 50%, but after the acquisition of First Republic Bank in 2023, the proportion of net interest income for jpmorgan has increased.

Logically speaking, in the Federal Reserve's interest rate cut cycle, banks will receive lower interest income, which may lead to a decline in net interest income. However, for the financial markets, an interest rate cut cycle means ample liquidity, which is likely to drive market prosperity. During this time, the commission income and service fees for investment banking business will also increase.

Conversely, in an interest rate hiking cycle, it is a significant bullish factor for banks' interest income. However, interest rate hikes may impact the financial markets, leading to a potential decrease in commission income and service fees for investment banking business.

As a result, jpmorgan's net interest income and non-interest income form a natural hedge. When one business segment's income declines, it is likely to be offset by the growth of the other business segment, and vice versa. This provides a certain level of revenue stability for the operation.

Specifically, jpmorgan's revenue performance does reflect this pattern. From 2020 to 2021, to address the pandemic, the USA initiated an interest rate cut cycle resulting in two consecutive years of declining net interest income for jpmorgan, while non-interest income continued to grow. As a result, the overall revenue showed a slight increase. In the interest rate hiking cycle of 2022-2023, the situations of interest income and non-interest income reversed, yet overall revenue growth remained relatively stable.

In the recent two fiscal quarters, jpmorgan's net interest income has seen consecutive sequential declines, but non-interest income continues to show sequential growth, which has sustained the stability of revenue growth.

For the future performance of jpmorgan, it might still be necessary to take a long-term perspective. A fluctuation in performance over one or two fiscal quarters is normal, but if there are continuous declines for several fiscal quarters, the certainty of its investment will decrease significantly. Therefore, we need to closely monitor the long-term stability of its revenue and profit.

2. The Stability of Risk Indicators

The business models of banks are essentially to earn interest spreads, attracting deposits at low interest rates, and then lending out at higher interest rates, therefore the banks have very little own capital relative to total assets, with extremely high leverage. For example, even for large banks with very stable performance like JPMorgan, their asset-to-liability ratio exceeds 90%.

The high leverage of banks brings potential high risks, and banks are one of the important cornerstones of the financial system. Once banks collapse on a large scale, the entire financial market will be in turmoil. Therefore, regulatory institutions have set some hard requirements on some financial indicators of banks.

The first indicator is the Common Equity Tier 1 (CET1) Capital Ratio, which is a key indicator of bank financial soundness, used to measure the proportion between the bank's common equity (common stock plus retained earnings) and its risk assets. This is a regulatory indicator set by the Basel Committee on Banking Supervision, with the minimum required CET1 Capital Ratio of around 4.5%. In addition, banks in different countries may also have additional requirements for capital buffers, but generally not exceeding 11%.

JPMorgan's Common Equity Tier 1 (CET1) Capital Ratio in 2024Q2 is approximately 15.3%, significantly higher than the requirements of the Basel Accord, and also exceeds regulatory requirements of other banks.

The second indicator is the non-performing loan ratio, which is the ratio of non-performing loans to total loans, also an indicator of loan asset quality. Generally, loans that are overdue for more than 90 days may be defined as non-performing loans, the more of these loans, the more potential bad debts and larger potential losses for banks.

JPMorgan's non-performing loan ratio in 2024Q2 is approximately 1.3%, slightly above the 1% level, indicating relatively good loan quality.

The third indicator is the provision coverage ratio, which is the ratio of funds reserved by the bank for non-performing loans to the amount of non-performing loans, representing the extent to which the bank covers potential losses. The higher this ratio, the more attention the bank pays to potential loan loss risks and the more stable the operation.

JPMorgan's provision coverage ratio in 2024Q2 is approximately 125%, reserving enough funds for potential loan losses, relatively stable.

For future earnings reports, we can continue to observe JPMorgan's capital adequacy ratio, non-performing loan ratio, allowance coverage ratio, and other risk monitoring indicators to see if it can continue to maintain financial stability. If any negative changes occur, we may need to pay more attention.

3. Sustainability of shareholder returns

For bank stocks, in addition to the relatively stable stock price, many investors are interested in the shareholder returns. The returns to shareholders by listed companies are generally reflected in two aspects: dividends and buybacks.

Among them, dividends are the most direct way to reward shareholders, while buybacks can increase the company's return on equity and earnings per share, and inject additional liquidity into the market, which can be said to be a win-win situation and very popular among shareholders.

In the past decade or so, JPMorgan's dividends and buybacks have been relatively generous. From 2011 to 2023, JPMorgan's cumulative dividends were $122.5 billion, cumulative buybacks were $132.1 billion, and the total net profit during this period was $364.6 billion. The cumulative dividends and buybacks accounted for approximately 70% of the net profit, although it is not as high as some companies with buyback ratios close to 100%, it is still considered good.

However, looking at the changes in the ratio of dividends and buybacks to net profit, in the past two years, this ratio for JPMorgan has been below 50%, significantly lower than the average of the past decade. In the future, we can observe if the company will increase buybacks and dividends, thus providing investors with continuous shareholder returns. If this ratio continues to decline, it may have an adverse impact on its long-term stock price trend.

Seeing this, you may have some new insights on how to read JPMorgan's performance. It is worth mentioning that every earnings release by many star companies may mean a rare trading opportunity for different types of investors.

Please use your Futubull account to access the feature.

Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

For the performance of JPMorgan, we can mainly focus on three key points: the stability of earnings, the robustness of bank risk indicators, and the consistency of shareholder returns.

For performance, JPMorgan's revenue and profits may fluctuate with the economic cycle, and we can observe the stability of its long-term trend.

For risk indicators, we need to pay close attention to whether JPMorgan's core capital adequacy ratio, non-performing loan ratio, and provision coverage ratio can sustain a relatively healthy level.

For shareholder returns, we can focus on the proportion of dividends and repurchases to net profit at JPMorgan, and whether it can return to a higher level in future quarters.

Every time a company releases its business performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.