Description

JPMorgan Chase & Co. provides global financial services and retail banking. The Company provides services such as investment banking, treasury and securities services, asset management, private banking, card member services, commercial banking, and home finance. JP Morgan Chase serves business enterprises, institutions, and individuals.¹

Investment Rationale

Although we are seeing a slowdown in the US economy, robust consumer spending will partially offset the declining loans growth for commercial and industrial (C&I) loans. We believe JPM’s net interest margin will be driven by cards loan growth and well managed expenses.

Reasons for Buying

Consumer loan growth to hold up. Average loans were up 2% YoY, driven largely by consumer credit card loans. Credit card loans were up 8% YoY, driven by low unemployment, labour and wage growth. We think that loans growth will continue to be driven by consumer loans growth.  The modest rise in the University of Michigan consumer confidence index from 98.2 to 98.4 in July highlighted that consumer spending remains solid. This is consistent with the rise in core retail sales, which rose 7.5% YoY annualised for Q2. We think that real consumption growth grew more than 4% annualised in the Q2 and is likely to hold up for Q3.

Deposit repricing stabilising in response to a low interest rate environment. Non-interest bearing deposits have declined 2% YoY, but have rose 2% QoQ. We see non-interest bearing deposits stabilising in anticipation of lower interest rates. As consumer deposit betas are low, we have yet to see much repricing despite the Federal rate hikes. Wholesale deposits have seen faster repricing during the monetary tightening cycle, but we expect them to be repriced faster downwards as the Fed cuts interest rates. It is worth noting that non-interest bearing deposits account for 33% of total deposits of JPM. Non-interest bearing deposits provide JPM a buffer against any movements in interest rates.

Mortgage loans growth held up by low mortgage interest rates.  Total mortgage origination volume was up 14% YoY in Q2, mainly due to lower mortgage interest rates. Moving forward, we expect mortgage originations to be held up by lower interest rates.  The rebound in new home sales in June illustrated that healthy new home inventory will support sales. The number of new home sales reached 338,000 in June, which showed a recovery from May and June. In our view, we may see a slow gain in mortgage originations for Q3 despite a slowing economic outlook.

RECOMMENDATION

We have a TECHNICAL BUY rating for JPM. We are encouraged by consumer loans growth despite a lower interest rate environment. We think that net interest margin for JPM will be held up by stabilising deposit repricing and higher card margins. We are also positive on the increased dividend and share buyback plans of JPM, which will likely provide more capital returns for investors. JPM is currently trading at a P/E ratio of 12.1, which is below the historical average. Based on our analysis, we think JPM is reasonably priced compared to its peers, given its robust earnings and continued loans growth.

[1] Source: Bloomberg

Support 1: 109.73                  Resistance 1: 117.27

                                                   Resistance 2: 120.00

JPM may break out from the range of 90.49 to 119.33 soon. The inverted head and shoulder formation suggests a continuation of the bullish rally. The ascending triangle, which is a strong continuation pattern, further confirms the bullish rally.

Although the stock prices are currently ranging, prices are trending above all three moving averages. The recent 22 and 50 SMA cross gave a strong signal that JPM is set for a bullish rise in the near term.

CHART LEGENDS

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