Rising Expenses And Margin Compression Will Undermine Future Earnings

Key Takeaways

• Increased expenses and rising credit costs could compress margins, affecting JPMorgan's earnings and shareholder value.
  
• Regulatory changes and sector challenges, including margin compression and loan origination fluctuations, may limit growth initiatives.
  
• Strong capital management and diversified revenue streams position JPMorgan Chase to sustain growth, enhance earnings, and maintain stability amid economic uncertainties.

Catalysts

Operates as a financial services company worldwide.

• JPMorgan Chase's expenses are projected to rise to approximately $95 billion in 2025, driven by increased investments in auto leasing, capital markets, technology updates, and marketing endeavors. This growth in expenses, especially related to compensation and infrastructure, could compress net margins if revenue growth does not keep pace.
  
• The firm anticipates deposit margin compression due to lower rates, impacting net interest income. With the company expecting NII ex Markets to be about $90 billion and Markets NII to rise to $4 billion, overall growth may be subdued, potentially affecting earnings if interest rates continue to decline or if competitive pressures increase further.
  
• JPMorgan Chase is experiencing sector-relevant challenges, such as fluctuations in loan origination volumes across areas like C&I and commercial real estate. Seasonal declines in market activities and paydowns in loans are further constraining growth prospects, which could temper revenue growth if these trends persist.
  
• The potential increase in regulatory capital requirements, particularly concerning the G-SIB surcharge, could influence capital deployment strategies. If JPMorgan needs more capital or if regulatory changes make capital management more complex, this might limit the company's ability to fund growth initiatives or return capital to shareholders, thereby impacting earnings and shareholder value.
  
• JPMorgan Chase's projected 2025 credit costs reflect an anticipated card net charge-off rate of 3.6%, suggesting expectations for potential increases in consumer credit losses. If economic conditions were to deteriorate or unemployment rates rise, credit performance may weigh on net income, leading to growth that falls below consensus expectations.

JPMorgan Chase Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on JPMorgan Chase compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming JPMorgan Chase's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 34.1% today to 27.5% in 3 years time.
• The bearish analysts expect earnings to reach $47.5 billion (and earnings per share of $18.73) by about April 2028, down from $56.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from 11.5x today. This future PE is greater than the current PE for the US Banks industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 2.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

JPMorgan Chase Future Earnings Per Share Growth

Risks

• JPMorgan Chase reported significant revenue growth driven by higher asset management fees, investment banking fees, and an increase in markets revenue, which could positively impact their revenue and earnings in the future.
  
• Higher client investment assets and consistent inflows across channels in Asset & Wealth Management may sustain or increase net margins and profits due to growth in management fees and performance fees.
  
• The expansion in consumer card services and auto originations indicates robust account acquisition and growth that could contribute to revenue and net income stability.
  
• The firm's strategic positioning with a high CET1 ratio and ongoing share repurchase program indicates strong capital management that could support earnings stability and offer resilience against broader market risks.
  
• The firm's consistency in capital generation and efficient cost management, alongside ongoing investment in technology and new product development, might enhance future earnings and maintain net margins despite economic uncertainties.

Valuation

• The assumed bearish price target for JPMorgan Chase is $227.84, which represents one standard deviation below the consensus price target of $260.12. This valuation is based on what can be assumed as the expectations of JPMorgan Chase's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $330.0, and the most bearish reporting a price target of just $180.51.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $172.7 billion, earnings will come to $47.5 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $234.34, the bearish analyst price target of $227.84 is 2.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.