JP Morgan (NYSE:JPM) is set to report its earnings on Tuesday morning before the market opens. Its second-quarter results will be part of a big week for banking stocks. Many large financial firms are set to put out their earnings over the next few days.
The stock market as a whole is blasting off to new all-time highs. The S&P 500 just hit 3,000 for the first time. And the Dow Jones Industrials reached 27,000 as well. But bank stocks, generally, have missed the boat. JP Morgan stock has been one of the strongest names in the banking sector. But even it is still a few percent short of its 52-week highs. And JPM’s rivals like Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC) are trading way below their 2018 peaks.
Fairly Low Expectations
The banking sector, as a whole, is suffering from investor fatigue. The plunge in interest rates this year has made most folks give up on the banks. It’s clear that net interest rates are going to fall this quarter – potentially by quite a bit.
The problem is that short-term interest rates are still relatively high; meanwhile, longer-term rates have been plunging. As a result, banks still have to pay competitive rates to depositors on products such as money market funds and short-term CDs. But the rates the banks, in turn, can charge on mortgages and other loans have dipped sharply. Consequently, the banking sector’s profits have dropped dramatically. The Fed is likely to cut rates soon, in part to help alleviate this pressure on the financial system. But the central bank obviously won’t be able to boost the banks’ Q2 profits.
That said, I’d argue this pressure is already priced into the banking stocks. Many analysts are expressing sentiments similar to those of John Heagerty of Atlantic Equities, who said,
“There is clear potential for investor disappointment at the upcoming results” out of the banking sector. That’s possible. But people realize that NIMs (net interest margins) are falling and that there has been a slowdown in other areas such as parts of investment banking. It’d take really bad results to surprise the market to the downside. Meanwhile, banks such as JP Morgan can point to better times coming over the next quarter or two.”
Big Capital Return Plans
The Fed just released the results of the latest stress tests of the nation’s largest banks. Nearly all passed with flying colors. That has enabled many large, too-big-to-fail banks to implement huge dividend increases and large share buyback programs. JP Morgan stock isn’t offering investors the most exciting dividend increase; that honor goes to Goldman Sachs with its jaw-dropping 47% dividend hike.
But JP Morgan is no slouch either. It’s hiking its quarterly dividend 13% to 90 cents per share of JP Morgan stock, or $3.60 per year, resulting in a sturdy 3.2% dividend yield.
More interesting is JPM’s buyback of JP Morgan stock. JP Morgan is pulling no punches on that front. The firm is prepared to buy back up to nearly $30 billion of JPM stock over the next year. Given that JP Morgan’s market cap is currently around $360 billion, this share buyback could sop up nearly 8% of the total outstanding shares of JP Morgan stock in just one year. Combine the buyback with the dividend, and that’s a double-digit-percentage total yield for the owners of JPM stock.
Earnings Won’t Be Down for Long
It’s important to remember JPMorgan’s unparalleled scale. JP Morgan may not have the largest retail banking franchise. But overall, by assets, JP Morgan is the biggest bank with $2.7 trillion of assets. Bank Of America (NYSE:BAC) has $2.4 trillion of assets, and none of the other top American banks come in over the $2 trillion threshold.
What makes JP Morgan so strong is that it combines a strong retail banking business with one of the best investment banks in the world. Most big banks are either good at investments like Goldman or good at retail,like Wells Fargo. JP Morgan does both well and that helps insulate its earnings. With the 2019 IPO boom under way, for example, JP Morgan should reap huge underwriting fees.
On the interest rate front, things are looking better as well. The 10-year treasury bond yield has already rebounded to 2.1%. That’s up from a recent low of 1.94%. Consequently, mortgage rates have risen substantially. Meanwhile, the Fed is about to cut the short end of the curve, likely this summer. That will give banks the benefit of 0.5 percentage points of favorable rate movement, which should start helping their earnings by the end of 2019.
The Verdict on JP Morgan Stock
Don’t mistake the temporary softness of banks’ profits for a downturn in the sector’s fortunes. JPM stock is a great example of this. Its Q2 earnings are unlikely to be as strong as some of the firm’s other recent reports.
But long-term investors are looking past this one weaker report and seeing the bigger picture. JPMorgan – and most of the other large national banks – have a ton of excess capital. They’ve acted prudently and conservatively for the past decade. With the economy continuing to boom, their loyal shareholders are about to get paid in spades. For JP Morgan stock in particular, this amounts to a healthy dividend hike and a massive buyback of JPM stock. Make no mistake; these factors will push JPMorgan stock higher in coming months, even if JPM’s Q2 earnings are a bit soft.
At the time of this writing, Ian Bezek owned WFC and GS stocks. You can reach him on Twitter at @irbezek.