Wide-moat JPMorgan Chase (JPM) reported solid third-quarter earnings per share of $3.12, beating FactSet consensus of $2.90 and our estimate of $3.03. The main beat came from net interest income, at $17.5 billion, roughly $1 billion above our own estimate. Guidance for NII of $19 billion in the fourth quarter is above our current forecast, and we expect to raise our 2022 NII outlook. Fees came in slightly below what we had projected while expenses came in roughly in line. Management maintained their full-year expense outlook of $77 billion. Fees should continue to face pressure over the medium term due to economic uncertainty (lower investment banking fees), lower market levels (lower wealth management fees), lower mortgage fees (higher rates), and lower deposit service fee growth; however, solid NII growth should continue to more than offset that.
Two big questions on every investor’s mind this quarter was credit and capital. From a capital perspective, JPMorgan is on its way to meeting it’s 13% common equity Tier 1 ratio target by first-quarter 2023. The bank’s ratio increased to 12.5% from 12.2% this quarter, and the bank generated nearly 60 basis points of common equity Tier 1 from net income alone. We expect share repurchases to remain at a minimum until then. From a credit perspective, we remain largely in wait-and-see mode. There was a slight reserve build during the quarter, with allowances increasing in the wholesale portfolio, however nonperforming assets continued to decline and charge-off rates didn’t show any real breakouts just yet. We are seeing some gradual increases in consumer delinquencies (card and auto), but nothing extraordinary. We expect economic pressure to continue to increase as the Fed remains on its aggressive rate path.
JPMorgan remains one of our top picks among U.S. banks, being one of the strongest franchises while trading at a relatively attractive valuation. We don’t plan any material revision to our current $149 fair value estimate.
