JPMorgan Chase 3Q21 Earnings Analysis

Business Description:

• Massive increase in deposits YoY mostly from Increase in Federal Reserve System balance sheet

• Increase in net income from release of reserves for credit losses of $2.1 billion in 2Q21 and economic recovery

Catalysts:

• Economic recovery in the US and around the World

• Rising interest rates

• More release of credit losses → do not contribute to actual growth, only paper growth

• Increased dividends and share buybacks

Risks:

• Zero interest rates, QE and banking regulations (Dodd-Frank Act of 2011) makes makes it harder for banks to do business

Financial Analysis:

Valuations

• My personal Biases

  • 5.5% of my portfolio, buying since 2016

  • Likes management

• Assumptions

  • Net income of $52.5 Billion for FY21 with further release of credit losses and economic recovery

  • Net income falls to $40 Billion in FY22, increasing by 4% annually

  • Discount Rate of 10% for the next 5 years

  • Terminal Growth rate of 2%

• Exit Multiples Analysis

  • Based on Tangible Book value in 2025

  • 2% annual increase in book value for base case (2.3% in last 5 years)

  • 2.3% for bull case and 1.8% for bear case

  • 4% of tangible book value paid in dividends every year (average for last 5 years)

  • 15% of shares outstanding bought back over next 5 years in base case, 20% in bull case and 10% in bear case

  • Price to Tangible book value per share ranged from 1.2 to 2.3 in last 5 years, currently at 2.3, expected to rise if interest rates rises

Conclusion

• Stock undervalued but future returns not expected to be much at current price

• Good hedge against rising interest rates

• Good stock to hold long-term