JPMorgan Chase: This banking giant has very substantial upside potential (NYSE: JPM) | Private Equity Weekly

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In my previous article (posted October 13, Q3 2023), I introduced J.P. Morgan Chase & Co. (New York Stock Exchange: JPMorgan Chase), I give it a Strong Buy rating citing its estimated fair price The stock price was approximately $314.74, an increase of 85% from the then-current share price of $170.1. The share price is around $196.6, indicating that the stock has gained 15.57% since my last article.

In this article, I will update my JPMorgan model using information for the fourth quarter of 2023, released on January 12. After completing the valuation process, I arrived at a fair price estimate of $237.41 per share, representing a 20.7% upside from the current price of $196.6. Furthermore, the model suggests a future price of $407.06, which would imply an annual return of 17.8% in 2029.

Overview

growth plan

JPMorgan declare February 6 By 2027, they will open approximately 500 new branches. This certainly represents risk and opportunity. The opportunity is to take deposits from people who are not near a JPMorgan Chase branch.This expansion mainly focuses on low-income areas and rural communities. The risk is that if not enough people (or businesses) put money into JPMorgan, it will mean that some of those 500 new branches won’t be profitable.

How does JPMorgan compare to its peers?

Among the three major banks, JPMorgan ranks second as its total cash reserves cover approximately 58% of deposits and 1.92 times total debt. However, Bank of America Corporation (BAC) can cover 72% of its deposits with its cash reserves and 2.02x total debt. As a result, Bank of America scores higher than JPMorgan Chase.

If we divide the total deposits in these banks by the total deposits in the U.S. banking system (Approximately $17.4 trillion) We can deduce that JPMorgan Chase’s market share is about 13.80%, which is slightly higher than Bank of America’s 11.06%. Wells Fargo ranks third, holding about 7.81% of deposits. However, this shows that the three banking giants (in theory) have a lot of room to grow.

Industry Outlook

this U.S. traditional banking marketIncluding retail banking and commercial banking, it is expected to expand at an annual rate of 1.44% in 2028. Global Investment Banking Revenue is expected to grow at a compound annual growth rate of 1.4% during the same period. Between these two markets, the addressable market (in terms of revenue) is $1.03T.

at last, Global Asset Management and wealth management It is expected to grow faster, with annual growth rates of 4.40% and 5.90% respectively. The addressable market for asset management is $402.98B, while the addressable market for wealth management is $120.96T assets.

Summarizing all this, we can infer that JPMorgan’s addressable market (in terms of revenue) is approximately 1.43T, including traditional banking and investment banking as well as asset management, and an addressable market of 120.96T in assets (in terms of AUM) in wealth management aspect. By 2028, the addressable market for the first three segments is expected to reach US$1.56T (by revenue), and the wealth management field will reach US$158.71T (by AUM).

Valuation

In this article, I will use the residual income model to value JPMorgan Chase. In the table below, you can see all the current financial information needed to continue the model through the fourth quarter of 2023. In addition, the discount rate in the model will be calculated through a simple CAPM model.

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The first step is to fill in the operating assets and book value variables and then forecast them over the years. Starting with operating assets, I will subtract cash reserves and deposits from total assets. The reason is that the cash-generating assets are the loan book and the deposits are the operating liabilities. Total operating assets are $70.83B. Meanwhile, the book value is $327.87B. Compared to revenue, profit margins are 57.92% and 224.56%, which will be used to estimate these two figures throughout the forecast process.

The second step is to deduct the additional revenue that each of the 500 new branches will add. The first thing to note is that these branches are limited to consumer and community and business banking. JPMorgan won’t open wealth management offices in rural areas because the vast majority of money is in big cities.So, I divided 2023 consumer and community banking revenue of $70.14B and commercial banking revenue of $15.54B by JPMorgan Chase has an estimated 4,700 branches have. The results of this division are $14.92 million and $3.3 million per branch, respectively. Then, beyond 2027, consumer and community and commercial banking will grow at a projected market growth rate of 1.44%.

Subsequently, other market segments such as corporate and investment banking, asset and wealth management will follow the pace of the overall market, growing at 1.40% and 5.15% respectively. The reason is that the revenue generated by these divisions depends on how well JPMorgan’s assets are managed (in the case of wealth management) and how accessible JPMorgan is (in the case of investment banking).

Next, I need to calculate the net profit. I’ll do this through net profit margin. This will also indirectly lead to the Fed trying and predicting future interest rates. For 2024, I expect the Fed to implement rate cuts, which will reduce JPMorgan’s profitability and revenue because customers will pay less in interest. The net profit margin here decreased by 29.29%, as the net profit margin decreased by 4.65% in 2019-2020, from 33.08% to 28.43%.

For 2025, I expect lower interest rates to lead to increased loan consumption, which should make up for JPMorgan’s reduced interest income from lower rates. The net profit margin here was 33.94%, making up for a 4.65% loss.

Next, I set the 2026 net profit margin at 31.47%, which is consistent with the 2017-2023 TTM.

However, here comes the real challenge: when will the Fed raise interest rates again?Well, I mean, the Fed will not raise interest rates by much in 2027, maybe 2.25% (close to What happened in 2019). Due to rising interest rates, JPMorgan Chase’s revenue and profitability have increased. This year’s net profit margin is 36.12%, an annual increase of 4.65%.

Additionally, because of this, I will also let 2027 revenue decline by 7.27%, as this is the approximate rate of change in JPMorgan Chase’s revenue from 2019-2020 when the Fed cuts rates in 2019-2020 and when the Fed raises rates in 2021 -2022.

Then by 2028, the net profit margin will fall to 31.47% as slowing consumption outweighs the benefits of rising interest rates. Therefore, by 2028, the Fed should lower the assumed interest rate of 2.25%.

Finally, net margin will increase to 33.94% by 2029 as lower interest rates increase consumption and demand for JPMorgan loans increases.

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Finally, the model will also arrive at a future price for fiscal 2029, calculated by dividing undiscounted residual earnings by the total number of common shares outstanding.

As you can see, the model suggests a fair price for JPMorgan Chase is around $237.41 per share, which is a 20.7% upside from the current share price of $196.60. Additionally, the model suggests a share price of $407.06 in 2029, representing an annual return of 17.8% based on the current dividend yield of 2.35%.

How does my estimate compare to the average consensus?

If I build a model based solely on the average analyst estimate, I get a fair price of $194.19 per share, which suggests room for a 1.2% downside from the current share price of $196.6. This hypothetical model suggests a future price of $331.06, implying an annual return of 11.4% in 2029.

In the image below you can see how the two results compare to each other. For fiscal 2024, my estimate is about 2.44% higher, so this is achievable. Then the other aspect you can see is that for fiscal 2027, the average consensus suggests that EPS will be down around 17%, while my forecast is 5.82%.

Now, in the chart below, you’ll be able to infer that the reason has to do with net margin, as my revenue estimate was significantly lower than the average consensus.

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Dissertation Risks

The main risk to my thesis is that JPMorgan Chase’s plan to open 500 branches (mostly in rural areas) could go awry because the areas where JPMorgan Chase will expand are less populated. However, it’s better to be the first because if they do that, then other big banks won’t see entering rural areas as a profitable venture.

Additionally, banking is already a growth market, which means it’s possible for JPMorgan to grow through mergers and acquisitions, but regulators will stop it because JPMorgan is already too big.

I think JPMorgan Chase fares better in the banking industry because it has a reputation as a well-managed bank, and during banking panics people rush to put their money in safer banks, one of which is JPMorgan Chase.

in conclusion

All in all, JPMorgan Chase is still a very reliable financial institution and it can cover about 58% of deposits, which is good because during banking panics, people prefer to move their funds to big banks like JPMorgan Chase.

The main risks include the failure of the 500 new branches to achieve expected performance and the inability to make profits. However, since expansion will be targeted at small population centers, being first there will help make it unprofitable for competitors to enter the area.

According to my estimates, the stock is still significantly undervalued by about 20.7%, which implies a fair price of $237.41 per share. Additionally, my model recommends a future price of approximately $407.06, implying a full-year 2029 return of 17.8%. For these reasons, I maintain my Strong Buy rating on JPMorgan Chase.