Revisiting JPMorgan After a Record-Breaking Year

Our earlier piece identified five under-appreciated risks: consumer credit deterioration, CRE exposure in the office sector, regulatory capital inflation from Basel III, the succession premium embedded in Dimon's leadership, and the normalisation of net interest income from peak levels. We gave the bank credit for its execution but argued the stock was pricing in perfection.

The consumer credit risk has become more visible. Card delinquency rates across the industry have risen to 2.8% — above pre-pandemic levels. JPMorgan's consumer book is better underwritten than most, but the trend is directionally negative. The bank increased its provision for credit losses by $1.2 billion in the most recent quarter — real money, even for a bank this size.

The CRE risk has stabilised somewhat. Office vacancy rates remain elevated, but the pace of deterioration has slowed. JPMorgan's CRE exposure is manageable relative to its capital base, and the reserves appear adequate. We are removing this from our active risk list.

Net interest income — the spread JPMorgan earns between deposit rates and lending rates — surged during the rate hiking cycle. That tailwind is reversing. The Fed has begun cutting, and the yield curve dynamics that supercharged bank NII in 2023-2024 are normalising.

JPMorgan guided for NII to decline 4-6% in the coming quarters. On a $90+ billion NII base, that represents a $4-5 billion headwind. The investment banking and trading businesses can partially offset this — and they have been strong — but they are inherently more volatile. Replacing predictable NII with trading revenue is not a quality upgrade.

The 41% operating margin looks impressive but includes the peak NII contribution. Normalised for a lower-rate environment, we estimate the operating margin settles around 36-38%. That is still excellent by banking standards, but it represents a 300-500 basis point compression from current levels.

We have watched bank margins through three rate cycles now. The compression phase always catches investors off guard because the headline earnings stay strong for one or two quarters after the inflection — buoyed by lagged balance sheet repricing. By the time the compression becomes visible in reported numbers, the stock has already derated.

EPS of $20.03 at 14.7x trailing gives a share price around $295. The forward PE of 13.7x looks cheap, but it is based on consensus estimates that we believe are 5-8% too high. If NII compresses as we expect and credit provisions continue rising, normalised EPS is closer to $18.50-19.00, which puts the effective PE at 15.5-16x.

The $794.5 billion market cap makes JPMorgan the most valuable bank in the world. The consensus target of $337.75 implies 14% upside. We think the upside is more limited — perhaps 5-8% — once the NII compression becomes consensus. The dividend yield offers some cushion, but at these levels, the risk-reward tilts neutral at best.

There is an intangible risk we flagged before and still hold: the Dimon premium. Jamie Dimon has steered this bank through every crisis since 2005. His eventual departure — he turned 70 this year — removes a management premium that we estimate at 1-2 multiple turns. No successor, however competent, walks in with that credibility.