In mid-January, JPMorgan Chase & Co. (JPM) will announce its Q4 2014’s financial results. As 2014 comes to close and JPM looks to 2015, the company offers a fair price relative to its financial strength and is arguably the best managed money-center bank in the country right now.
Wall Street analysts tend to agree, with 24 out 27 rating the JPM either a buy or strong buy. Even with all the support, JPM stock trades at just over 10 times forward earnings with a consensus stock price of $67.90, an 8.5% premium to its current trading range and offers a 2.6% dividend yield at a 29% payout ratio.
JPM recently settled allegations that it manipulated foreign exchange markets and was also the victim of a cyberattack made possible by the bank’s failure to update a security fix on a server. This made regulators take greater notice, and they have been pushing all banks to close any gaps in their cybersecurity compliance and policies.
This is in addition to the increased compliance costs driven by new regulations issued by the Consumer Finance Protection Bureau and other agencies that will continue to weight on JPM’s efficiency ratio.
In addition to troubles that happened in 2014, JPM may still face potential actions relate to the London Whale scandal that cost the bank $6.2 billion in 2012. Although Jamie Dimon has been able to maintain his rock star CEO status, the above issues clearly show signs that running large and complex financial institution effectively is not an easy task.
JPM Stock Peformance
JPM saw declining revenues in 2010 and 2011, which stabilized into flat revenue growth in 2012 and 2013. For 2014, I would expect revenues to come in mostly flat again with full year earnings per share in the $5.40-$5.50 range, a drastic improvement from 2013’s $4.35 mark.
Over the past year deposits have grown nearly 9%, surpassing much of the market, thanks to JPM’s great customer service compared to peers. JPM has also continued to report strong growth in investment banking and asset management.
And while not directly impacting JPM stock price in 2015, investors also should keep a close eye on commercial and industrial portfolios for all commercial lenders. I would expect increased competition from shadow banks and peer-to-peer lenders, which are gaining greater prominence and acceptance with the public and small businesses.
These operators typically have lower operating and regulatory costs than more traditional banks, making it hard to compete. If these lenders are able to gain greater foothold in an expanding market, JPM and other traditional banks may face stiffer loan growth headwinds.
The Bottom Line
I am expecting short-term interest rates to rise in 2015, which should steepen the yield curve and help JPM’s net interest income that compromises about 45% of the bank’s revenue. This will drive 2015 earnings per share along with increased earnings from investment banking and trading, which frequently increase during times of increased economic activity. But earnings will be slightly offset by lower non-interest income from areas such as mortgage banking.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
