Nov 04, 2019

JPMorgan Chase & Co. (JPM) Long Term: 6-12 Months Zacks Recommendation: Neutral
(Since: 04/04/19)
$127.80 (As of 11/01/19)
Prior Recommendation: Underperform
Price Target (6-12 Months): $136.00
Short Term: 1-3 Months Zacks Rank: (1-5) 3-Hold

Zacks Style Scores: VGM: C

Value: C Growth: D Momentum: B

Summary Price, Consensus & Surprise

JPMorgan's shares have outperformed the industry over the
past six months. It has an impressive earnings surprise
history, having surpassed the Zacks Consensus Estimate in
three of the trailing four quarters. Defying market
expectations, the company recorded impressive bond trading
and underwriting business performance in third-quarter 2019,
while lower interest rates and muted loan growth hurt. Decent
loan demand, acquisition of InstaMed, opening of new
branches and focus on strengthening credit card business will
aid financials amid the Fed’s accommodative policy. The
company’s significant dependence on capital markets
revenues makes us apprehensive, given the several
geopolitical concerns. Also, the bank is likely to face
challenges in expanding mortgage operations. Thus, these
matters are expected to hamper fee revenue growth.

Data Overview Sales and EPS Growth Rates (Y/Y %)

52 Week High-Low $129.42 - $91.11 Sales EPS

20 Day Average Volume (sh) 11,316,382

Market Cap $399.4 B

YTD Price Change 28.0%

Beta 1.21

Dividend / Div Yld $3.60 / 2.9%

Industry Banks - Major Regional

Zacks Industry Rank Bottom 30% (177 out of 254)

Sales Estimates (millions of $)

Last EPS Surprise 9.8%
Q1 Q2 Q3 Q4 Annual*
Last Sales Surprise 3.3%
2020 28,806 E 28,673 E 28,775 E 27,691 E 113,944 E
EPS F1 Est- 4 week change 3.2%
2019 29,123 A 28,832 A 29,341 A 27,120 E 114,416 E
Expected Report Date NA 2018 27,907 A 27,753 A 27,260 A 26,109 A 109,029 A
Earnings ESP -0.1%
EPS Estimates
Q1 Q2 Q3 Q4 Annual*
P/E TTM 12.9
2020 $2.61 E $2.63 E $2.71 E $2.48 E $10.42 E
P/E F1 12.3
2019 $2.65 A $2.59 A $2.68 A $2.26 E $10.36 E
PEG F1 1.8 2018 $2.37 A $2.29 A $2.34 A $1.98 A $9.00 A
P/S TTM 2.8 *Quarterly figures may not add up to annual.

The data in the charts and tables, including the Zacks Consensus EPS and Sales estimates, is as of 11/01/2019. The report's text is as of
11/04/2019.
Overview
Headquartered in New York, JPMorgan Chase & Co. is a financial
holding company with assets worth $2.76 trillion and stockholders’
equity worth $264.3 billion as of Sep 30, 2019. With operations in more
than 60 countries, the company (incorporated under Delaware law in
1968) is one of the major financial service firms in the world.

JPMorgan organizes its business through following five reportable

segments:

Consumer & Community Banking (CCB) segment (constituting

21% of total assets as of Dec 31, 2018) serves consumers and
businesses through personal service at bank branches and
through ATMs, online, mobile and telephone banking. CCB is
organized into Consumer & Business Banking, Mortgage Banking
and Card, Commerce Solution & Auto.

Corporate & Investment Bank (CIB) segment (34%) offers a

wide range of investment banking, market-making, prime
brokerage, and treasury and securities products and services to a
global client base of corporations, investors, financial institutions,
government and municipal entities.

Commercial Banking (CB) segment (9%) provides lending,

treasury services, investment banking and asset management
services to corporations, municipalities, financial institutions and
non-profit entities.

Asset & Wealth Management (AWM) segment (7%) provides services to institutions, retail investors and high-net-worth individuals. It
offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity including money
market instruments and bank deposits. The segment also offers trust and estate, banking and brokerage services.

Corporate segment (29%) consists of Treasury & Chief Investment Office (CIO) and Other Corporate, which includes corporate staff units
and centrally managed expenses.

In July 2019, JPMorgan acquired InstaMed Holdings Inc.

Reasons To Buy:
Decent loan demand continues to support JPMorgan’s net interest income (NII) and net JPMorgan's net interest
interest yield. Over the last four years (2015-2018), NII witnessed a CAGR of 8.2%, with trend income will continue to rise
continuing in the first nine months of 2019. While net interest yield improved to 2.50% in 2018 modestly, given the decent
from 2.36% in 2017 and 2.25% in 2016, the same remained almost stable year over year for loan growth. Further, the
the nine months ended Sep 30, 2019. Improving economy and modest loan growth are acquisition of InstaMed
expected to continue supporting NII in the quarters ahead amid the Fed’s accommodative and plans to expand
monetary policy stance. branch network in new
markets will aid growth.
After consolidating its branch network for years to control costs and improve operating
efficiency, JPMorgan is now expanding its footprint in new regions by opening branches. The
bank aims to enter 15-20 new markets by the end of 2022, by opening roughly 400 new branches. The company has already made progress
on this front, with announcements to open branches in several new regions. In addition to enhancing market share, this expansion strategy
will help the bank grab cross-selling opportunities, by increasing its presence in the card and auto loan sectors. Further, in July, the company
acquired InstaMed, which will enable it to expand its reach into lucrative U.S. healthcare payments market. These initiatives are, thus,
expected to support the CCB segment.

Further, JPMorgan remains focused on acquiring the industry's best deposit franchise and strengthening its loan portfolio. Despite the
challenging market environment, total deposits and loan balances grew over the past several years, with the trend continuing in the first nine
months of 2019. As of Sep 30, 2019, loans-to-deposits ratio was 62%. Loan and deposits are likely to further grow in the quarters ahead,
driven by improving economy.

We are encouraged by JPMorgan’s capital deployment activities. The company cleared the 2019 annual stress test and has received
approval for its capital plan, which include an increase in quarterly dividend by 12.5% and buyback shares worth $29.4 billion. Given its solid
liquidity position and earnings strength, the company will be able to sustain improved capital deployments.

JPMorgan’s trailing 12-month return on equity (ROE) reflects its superiority in terms of utilizing shareholders’ fund. The company’s ROE of
14.63% compares favorably with 12.15% for the industry.

JPMorgan’s shares have outperformed the industry over the past six months. Also, the company's 2019 earnings estimates have moved 2%
upward over the past 30 days. So, given the fundamental strength and positive estimate revisions, the stock has upside potential.
Reasons To Sell:
Performance of JPMorgan’s mortgage banking operation has been muted. Over the last Mortgage banking and
three years (2016-2018), mortgage fees and related income declined at a CAGR of 29%. investment banking growth
However, the trend reversed in first nine months of 2019, mostly driven by strong performance challenges are key near-
in the third quarter as lower mortgage rates led to rise in refinancing activities and term concerns for
improvement in originations. Nevertheless, the bank is likely to continue facing difficulties in JPMorgan, and will
expanding mortgage business, given the increase in competition. hamper fee income
growth. A stretched
Further, JPMorgan’s significant dependence of capital markets revenues is a matter of valuation limits the stock’s
concern. The company’s investment banking division's performance is getting hampered by upside potential.
fears of global economic slowdown, ambiguity related to trade conflict and several other
geopolitical concerns. The similar trend persisted in first nine months of 2019, though there
was an improvement in total investment banking fees during the third quarter. With the above-mentioned concerns expected to linger in the
near term, performance of investment banking business will remain weak. Also, management lowered medium-term profitability target for the
unit to 18% as it requires more capital in 2019.

Though JPMorgan has resolved quite a many litigation issues, it still faces investigations from several federal agencies and a few foreign
governments for its business conducts in the pre-crisis period. Legal expenses are expected to continue weighing marginally on the
company’s bottom line in the near future.

Further, JPMorgan seems overvalued when compared with the industry. Its current price-to-book and price-to-earnings (F1) ratios are above
the respective industry averages.
Last Earnings Report
JPMorgan Q3 Earnings Top on Bond Trading, Underwriting Quarter Ending 09/2019

Better-than-expected underwriting business performance, rise in mortgage banking fees and Report Date Oct 15, 2019
higher bond trading income drove JPMorgan’s third-quarter 2019 earnings of $2.68 per share, Sales Surprise 3.30%
which outpaced the Zacks Consensus Estimate of $2.44. EPS Surprise 9.84%
Quarterly EPS 2.68
Rise in wholesale and credit card loans supported net interest income amid the Federal
Reserve’s interest rate cuts and decline in consumer loans. Moreover, home lending revenues Annual EPS (TTM) 9.90
rose 12% year over year, mainly due to substantially higher mortgage origination volume.

Additionally, as expected, fixed income trading revenues jumped 25%, given the strong client activity across products. Further, underwriting
revenues increased as both equity underwriting income and debt underwriting fees recorded a rise of 22% and 17%, respectively.

Among other positives, credit card sales volume was up 10% and merchant processing volume grew 11%. Further, Commercial Banking average
core balances jumped 3% and Asset & Wealth Management average loan balances were up 7%.

On the other hand, equity trading income was down 5% and advisory fees witnessed a 13% decline. Further, operating expenses increased in
the reported quarter. Also, provision for credit losses recorded a significant rise.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was decent. All segments, except Commercial
Banking and Asset & Wealth Management, reported a rise in net income on a year-over-year basis.

Net income increased 8% to $9.1 billion.

Fee Income Majorly Aids Revenues, Costs Rise

Net revenues as reported were $29.3 billion, up 8% from the year-ago quarter. Growth in balance sheet and higher fixed income markets results
were the primary reasons for the improvement. These were partially offset by lower interest rates. Also, the top line beat the Zacks Consensus
Estimate of $28.4 billion.

Net interest income increased 2% to $14.2 billion. Non-interest income was $15.1 billion, up 13%, mainly driven by impressive mortgage banking
performance.

Non-interest expenses (on managed basis) were $16.4 billion, up 5% from the year-ago quarter. The rise was primarily due to investments in
business and auto loan depreciation.

Deteriorating Credit Quality

Provision for credit losses was $1.5 billion, a jump of 60% year over year. This surge reflects absence of reserve releases and net recoveries that
were recorded in the prior-year quarter. Also, as of Sep 30, 2019, non-performing assets were $5.3 billion, up 6% from Sep 30, 2018. Further, net
charge-offs surged 33% year over year to $1.4 billion.

Strong Capital Position

Tier 1 capital ratio (estimated) was 14.1% as of third-quarter end compared with 13.6% on Sep 30, 2018. Tier 1 common equity capital ratio
(estimated) was 12.3% as of Sep 30, 2019, up from 12.0%. Total capital ratio was 15.9% (estimated) at the end of the third quarter compared
with 15.4% as on Sep 30, 2018.

Book value per share was $75.24 as of Sep 30, 2019 compared with $69.52 on Sep 30, 2018. Tangible book value per common share was
$60.48 at the end of September compared with $55.68 a year ago.

Outlook

Management projects NII to be less $57.5 billion in 2019 due to a number of factors, including lower long end rates and expectations of up to
three rate cuts this year.

Investment banking revenues are expected to decline in the fourth quarter both sequentially and year over year, mainly due to strong
performance in third-quarter 2019 and the prior-year quarter. Nonetheless, the company believes that pipeline remains healthy for M&As, and
equity and debt issuances.

For 2019, it expects operating expenses to be approximately $65.5 billion, up $2.7 billion from 2018 level. This additional spending includes $600
million of new technology investments and $1.6 billion for marketing, front-office hiring, new branches and a new headquarters building.

Net charge-offs are expected to be roughly $5.5 billion in 2019, up from $4.9 billion recorded in 2018.
Recent News
JPMorgan Expands Into Healthcare Payments, Acquires InstaMed - Jul 24, 2019

With an to expand its reach into lucrative U.S. healthcare payments market, JPMorgan completed the acquisition of InstaMed Holdings, Inc. The
financial terms of the deal were not disclosed, while CNBC reported (at the time of announcement in May) the value to be more than $500 million
(making it the bank’s biggest acquisition since the 2008 financial crisis).

Founded in 2004, Philadelphia-based InstaMed, which will operate as a subsidiary of JPMorgan Chase Bank, N.A, offers automated billing
services linking hospitals and doctors’ offices with patients and insurers. The firm has nearly 300 employees and processed $94 billion worth of
transactions last year.

The deal will, thus, complement JPMorgan’s huge corporate payments infrastructure, which processes more than $6 trillion of payments on a
daily basis.

InstaMed offers unmatched connectivity across the healthcare marketplace through its network of more than 50% of all healthcare providers with
millions of consumers and every type of payers in the U.S. The firm’s solutions are used by a broad range of healthcare clients.

Stuart Hanson, Head of Healthcare Payments, JPMorgan Chase said, “Together with InstaMed, we are able to design and deliver the future of
healthcare payments to providers, payers, and consumers. Investing in a complete payment and remittance management solution reflects our
commitment to the healthcare payments industry and to provide new, innovative offerings that make the customer experience better.”

Per the NHE Fact Sheet, healthcare spending was $3.5 trillion in 2017, and this is projected to grow at average rate of 5.5% per year over the
next decade to reach roughly $6 trillion by 2027. Therefore, JPMorgan’s plan will further diversify operations and help it make inroads into the
global payments business.

Dividend Update

On Sep 17, JPMorgan declared a quarterly dividend of 90 cents per share, representing a hike of 12.5% from the prior payout. The dividend was
paid on Oct 31, to stockholders of record at the close of business on Oct 4.

Valuation
JPMorgan’s shares are up 28% in the year-to-date period and 17.2% over the trailing 12-month period. Stocks in the Zacks sub-industry and the
Zacks Finance sector are up 25.6% and 14.8%, respectively in the year-to-date period. Over the past year, the Zacks sub-industry and the sector
are up 8.9% and 5.3%, respectively.

The S&P 500 index is up 21.1% in the year-to-date period and 11.2% in the past year.

The stock is currently trading at 12.28X forward 12 months earnings, which compares to 11.31X for the Zacks sub-industry, 14.64X for the Zacks
sector and 17.62X for the S&P 500 index.

Over the past five years, the stock has traded as high as 15.74X and as low as 8.65X, with a 5-year median of 11.07X. Our Neutral
recommendation indicates that the stock will perform in line with the market. Our $136 price target reflects 13.06X forward earnings.

The table below shows summary valuation data for JPM

Industry Analysis Zacks Industry Rank: Bottom 30% (177 out of 254) Top Peers

Bank of America Corporation (BAC) Neutral

BB&T Corporation (BBT) Neutral

Citigroup Inc. (C) Neutral

The Goldman Sachs Group, Inc. (GS) Neutral

Morgan Stanley (MS) Neutral

The PNC Financial Services Group, Inc Neutral

(PNC)
U.S. Bancorp (USB) Neutral

Wells Fargo & Company (WFC) Underperform

Industry Comparison Industry: Banks - Major Regional Industry Peers

JPM Neutral X Industry S&P 500

281.28 B 162.34 B 227.49 B
VGM Score - -
7 7 9
Market Cap 399.43 B 35.50 B 22.82 B
2.30% 2.84% 3.95%
# of Analysts 5 8.5 13
Dividend Yield 2.88% 3.04% 1.87%
2.37 4.77 1.46
Value Score - -
-2.84 -8.71 3.45
Cash/Price 2.51 0.62 0.05
1.32 0.82 1.07
EV/EBITDA -4.40 5.88 13.31
1.15 0.91 1.32
PEG Ratio 1.78 1.45 2.10
9.58 8.33 8.54
Price/Book (P/B) 1.69 1.28 3.14
11.86 9.53 11.47
Price/Cash Flow (P/CF) 10.32 9.21 12.44
2.45 1.58 2.17
P/E (F1) 12.43 11.88 18.75
8.57% 10.77% 8.81%
Price/Sales (P/S) 2.82 2.45 2.56
0.99 1.36 1.33
Earnings Yield 8.29% 8.53% 5.46%
3.26 8.63 6.05
Debt/Equity 1.26 0.91 0.72
Cash Flow ($/share) 12.11 6.89 6.96
30.95% 13.07% 2.76%
Growth Score - -
2.74% 16.46% 6.31%
Hist. EPS Growth (3-5 yrs) 15.31% 13.49% 9.83%
25.85% 19.03% 3.01%
Proj. EPS Growth (F1/F0) 15.11% 4.42% 6.03%
14.04% 5.10% 2.49%
Curr. Cash Flow Growth 23.43% 18.05% 15.60%
0.92 1.00 0.86
Hist. Cash Flow Growth (3-5 yrs) 7.08% 7.84% 9.14%
47.56% 55.14% 54.26%
Current Ratio 0.93 0.90 1.25
24.16% 18.28% 21.67%
Debt/Capital 54.37% 44.97% 43.04%
12.05% 10.16% 13.01%
Net Margin 24.70% 22.74% 11.08%
0.05 0.05 0.05
Return on Equity 14.63% 12.15% 17.42%
-0.07% 1.46% -3.34%
Sales/Assets 0.05 0.05 0.55
Proj. Sales Growth (F1/F0) 4.94% 1.58% 2.80%
1.69% 2.76% 1.07%
Momentum Score - -
4.51% 4.92% 3.20%
Daily Price Chg 2.31% 1.76% 1.14%
12.44% 7.74% 6.50%
1 Week Price Chg 4.54% 2.95% 1.40%
10.18% 7.67% 11.27%
4 Week Price Chg 11.35% 7.39% 3.87%
12.44% 9.16% -3.60%
12 Week Price Chg 13.71% 9.42% 3.08%
52,842,844 12,137,547 19,940,336
52 Week Price Chg 14.63% 6.53% 10.52%
0.00% 0.29% 0.00%
20 Day Average Volume 11,316,382 4,882,291 1,832,998
1.87% 0.61% -3.92%
(F1) EPS Est 1 week change 0.00% 0.00% 0.00%
1.72% 0.32% -5.23%
(F1) EPS Est 4 week change 3.23% 0.54% 0.00%
-1.02% -0.57% -0.04%
(F1) EPS Est 12 week change 2.99% 0.22% 0.02%
(Q1) EPS Est Mthly Chg 1.27% -1.18% -0.46%
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Value Score
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Disclosures
This report contains independent commentary to be used for informational purposes only. The analysts contributing to this report do
not hold any shares of this stock. The analysts contributing to this report do not serve on the board of the company that issued this
stock. The EPS and revenue forecasts are the Zacks Consensus estimates, unless indicated otherwise on the report's first page.
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specific recommendation or views expressed by the analyst in the report.

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change.

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ZIR uses the following rating system for the securities it covers. Outperform- ZIR expects that the subject company will outperform the broader
U.S. equities markets over the next six to twelve months. Neutral- ZIR expects that the company will perform in line with the broader U.S.
equities markets over the next six to twelve months. Underperform- ZIR expects the company will underperform the broader U.S. equities
markets over the next six to twelve months.

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