Banking & Finance

Ten Key Takeaways for Investors After J.P. Morgan Investor Day

Following the market crash and ensuing recession in 2008, somebody was going to be named the bad guy. It wasn’t going to be the politicians who insisted that everybody had a right to own a house. It was going to be the big, bad, greedy banks and bankers. It was going to be the bad bond people who pooled thousands of bad mortgages and sold them as investment grade securities. It was going to be Wall Street.

Since the demise of Lehman Brothers in the fall of 2008, the targets have remained squarely on the brokerage firms and especially the big banks — the same banks that were said to be “too big to fail.” Perhaps the company with the biggest target is J.P. Morgan Chase & Co. (NYSE: JPM). Scrutinized on everything from a flamboyant and respected, highly compensated leader to a London trader called the Whale losing billions of dollars, the company remains in the spotlight. The company also remains one of the most widely owned stocks in the financial sector.

UBS attended the recent analyst day at J.P. Morgan, and its analysts came away with 10 specific items that they learned. These are interesting items for shareholders or investors considering taking a position in the iconic bank.

  1. The company’s 15% to 16% return on tangible equity target is better than most expected.
  2. Its $27 billion net income simulation should not be confused with a 2017-2018 target.
  3. Capital market revenue was down 15% in the first quarter. This resulted in an 8% first-quarter earnings per share downgrade.
  4. Its 2014 Comprehensive Capital Analysis and Review request is expected to be for a $6 billion stock buyback and to maintain the dividend.
  5. Regulators will require more capital to contain operational risk.
  6. Costs are expected to be $2 billion by 2016, down from 2014 levels.
  7. About 35% of its branches are 10 years or older. That gives it a nice edge compared to its competitors.
  8. The firm is much less optimistic on its mortgage business going forward. The pretax profit target cut was 23%.
  9. The investment bank is improving on its already leading position on Wall Street.
  10. The asset management division raised its pretax profit target 25%. That is 14% more than the UBS analysts had modeled.

The UBS team is very bullish on the prospects for J.P. Morgan going forward. They flat-out say that more than any bank they can think of, J.P. Morgan has emerged from the financial crisis as perhaps the biggest relative winner. The bank’s investor day confirmed that the company continues to take market share across all four of its business lines. Despite its strong franchise, the UBS team believes that the stock continues to trade at a significant discount relative to the sector. That makes J.P. Morgan one of the top, if not the top, banking stock to buy in the financial sector.