Banking, finance, and taxes
How Analysts View JPMorgan After Reserves Increase
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One sure way to get the attention of investors and analysts is to reveal that profits at a company are going to be lower than expected. CEO Jamie Dimon of JPMorgan Chase & Co. (NYSE: JPM) got a refresher course last week when he said that the megabank would add another $500 million to its reserves to account for potential bad loans to energy sector players.
The bank already had set aside $815 million for the purpose, and JPMorgan also added $100 million to its existing $240 million reserve for losses in the metals and mining industries. And if oil prices fall to around $25 a barrel for an extended period, the bank may have to add another $200 million or so to its reserves.
Analysts reacted about as one would expect. Bank of America Merrill Lynch reduced kept its Buy rating on the bank’s stock, lowered its price target and identified the top takeaways from the bank’s investor day meeting:
1) JPM reduced its CET1 minimum target to 11% (from 12%) which was supported by an improvement in their GSIB surcharge to 3.5%. Management expects to stay at the 3.5% level as they have captured the majority of the “low hanging fruit” and does not see the potential to reduce this buffer without impacting client activity.
2) JPM expects incremental reserves in 1Q16 due to $500mn of Oil & Gas reserves and $100mn in Metals & Mining, with an additional $1.5bn reserve build if oil prices fall to $25/bbl and stay there for 18 months (implying a 20% loss rate on its $14bn loans outstanding. Management noted that it has not seen any significant contagion thus far, and expects total net charge-offs of $4.75bn in 2016.
3) JPM reiterated its efficiency target of 55% +/- while noting that its CCB and CIB cost initiatives remain on track. Management guided towards adjusted expenses of $56bn, flat from 2015 levels, while still investing in growth opportunities.
4) 1Q16 Markets revenues (FICC + equity trading) down 20% YoY amid a particularly strong 1Q15 and IB revenues down 25% driven by lower ECM/DCM activity.
5) Management expects net capital return of 55-75% with a plan towards higher incremental payout. Over the long term, management did not rule out the potential that capital return could at some point reach >100% of earnings – which its new CET1 target could allow the company to achieve.
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