Under the Spotlight Wall St: JPMorgan Chase (JPM)

JPMorgan Chase ($JPM) shareholders won’t want CEO Jamie Dimon to change his mind after he downplayed interest in the biggest job in global finance: U.S. Treasury Secretary.

Dimon has been a steady hand since becoming CEO in 2006. He’s steered the world’s largest bank through tough times like the Global Financial Crisis and the era of super-low interest rates that followed. The quality of its retail and investment banking businesses has seen JPMorgan shares rise 86% over the past five years, beating rivals like Citigroup ($C) (-8%) and Bank of America ($BAC) (+40%).

Now the US$638b bank, which traces its history back to 1799, faces a new challenge: U.S. interest rate cuts. JPMorgan profited from the interest rate hikes used since 2022 to fight inflation. But that’s over. The Federal Reserve declared a tentative victory with a 50 basis point cut in September, and more cuts are coming: another two of 25bp are expected this year, and then four more to total 1% in 2025.  

Fed up

Concerns about the impact of lower interest rates on JPMorgan’s revenues dominated last week’s Q3 earnings call with analysts. 

The number in focus was net interest income (NII): revenue from interest on loans minus interest paid out on products like deposits. NII was US$23.5b – up 3% – in Q3, or more than half the reported net revenue of US$43b. 

What raised eyebrows was the forecast for NII of US$92.5b in all of FY24, implying a Q4 NII of US$22.9b. This would be a year-on-year (YoY) decline of more than 5%. There were so many questions about the NII outlook for 2025 that an exasperated Dimon said he didn’t want to spend the whole call talking about it and that ‘next time we should give you the number.’ 

While falling interest rates would be the main culprit, there are a number of reasons why NII will struggle and likely trough in mid-2025. Deposit growth is also important as it provides capital to invest in higher returning loans. And in JPMorgan’s retail bank, average deposits fell 8% YoY, as consumers spent cash built up during the pandemic. 

Competition for deposits meant JPMorgan had to offer more generous yields. However, yield seeking has eased and average deposits are expected to be flat this year, then recover later in 2025. Growth in credit card balances should help lift NII in late 2025.  

Wholesale deposits grew a little, but are expected to lift when the Federal Reserve ends quantitative tightening. The Fed isn’t buying government bonds like it did during quantitative easing. This means investors like banks and fund managers have had to step up. Those purchases have been funded from deposits. 

Wheelin’ and dealin’

What wasn’t in doubt in Q3 was the quality of JPMorgan’s investment banking franchise. 

The commercial and investment bank delivered net income of US$5.7b, on revenue of US$17b. The portion brought in via investment banking fees was up 31% YoY, and up 10% for advisory fees after it closed a few large deals. These included Home Depot’s ($HD) US$18.25 acquisition of SRS Distribution and Hewlett Packard Enterprise’s ($HPE) US$14b acquisition of Juniper Networks. 

Underwriting fees grew strongly, with debt capital markets (DCM) up 56% and equity capital markets (ECM) up 26% due to positive market conditions. JPMorgan is ranked number one in ECM and DCM activity this year. 

Deal making and IPO sentiment remains partly captive to the Fed’s decisions. If lower rates and a soft landing for the economy can be delivered, then that may sustain the market’s rally and boost confidence among dealmakers and companies looking to IPO. 

Chief Financial Officer Jeremy Barnum said the bank was ‘optimistic’ about its deal pipeline, but the stricter regulatory scrutiny of mergers and acquisitions, as well as the tense geopolitical situation, were sources of uncertainty. 

The Fortress 

JPMorgan is in a class of its own when it comes to its balance sheet. Regulators have a list of Global Systemically Important Banks (G-SIBs), and it’s on top of that list. That requires the bank to put additional capital aside as insurance. 

Dimon estimates the bank has at least US$30b of excess capital. That provides a healthy kitty as U.S. and global regulators discuss the next steps in regulation and capital buffers. Dimon says that, while JPMorgan can handle higher capital requirements, regulators need to think about their impact on lending and the economy. 

However, excess capital won’t mean a quicker pace of buybacks. Dimon says market levels are ‘at least slightly inflated’ and that it doesn’t make sense to buy back shares at more than 2x tangible book value.

Track record

The days of rising rates are over. That will require skilled management of a giant balance sheet to restore net interest income growth.

Dimon’s reputation as one of the best bankers of a generation has been built on managing the risks of a business where someone else’s debt is an asset. No wonder Uncle Sam has come knocking.  

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.