JPMorgan Chase (JPM 0.15%), America's largest bank, had an eventful year in 2020. While the coronavirus pandemic hit the bank hard and forced it to set aside tens of billions of dollars for future potential loan losses, the bank showed incredible resiliency, turning a very solid profit given the circumstances. JPMorgan's stock price is down only about 11% from where it began the year. Let's look at four things to expect from the bank in 2021.
1. Share repurchases and dividend increase
As soon as the Federal Reserve lifted its ban on share repurchases by large banks, JPMorgan Chase announced a $30 billion share repurchase program, and I don't see any reason why the bank won't repurchase this entire allotment in 2021. CEO Jamie Dimon has been chomping at the bit to return to repurchases since the Fed banned them in the third quarter, believing that is the bank's best use of its excess capital. If the bank does repurchase all $30 billion worth, that would be much more than the $24 billion in aggregate stock repurchases the bank made in 2019.
If coronavirus vaccines prove effective and the economy recovers quickly like it is supposed to, the bank will also likely increase its quarterly common dividend, which is currently $0.90 per share. The bank had been increasing its dividend over the past few years, and when the bank has a more regular quarter of profits like it did in the third quarter of this year and in 2019, JPMorgan Chase only had a dividend payout ratio in the 30th percentile.
Image source: JPMorgan Chase.
2. Opportunistic approach in asset management space
Consolidation in the asset management space has been accelerating, as evidenced by Morgan Stanley's two big acquisitions of E*Trade and Eaton Vance. Dimon has been very forthcoming about the bank's interest in participating in that consolidation. "Our telephone lines are wide open," he said on the bank's third-quarter earnings call. JPMorgan's asset and wealth management division has performed well during the pandemic and even grown profits. In the third quarter, the unit delivered net income of $877 million, up more than 30% year over year.
3. Releasing reserves back into earnings
Through the third quarter of 2020, JPMorgan Chase had set aside $33.6 billion for future potential loan losses, equating to 3.26% of its total loan book. That is a big number. The bank's net charge-off ratio (debt unlikely to be collected) in the third quarter of 2020 was only 0.49%, which is down from the third quarter of 2019.
Banks have been modeling for losses assuming no second round of stimulus. But we now know there will be a $900 billion second round of stimulus, and there is the potential for more once President-elect Joe Biden takes office. That will likely mean fewer losses for the banking sector, and if there is a quick recovery, other losses currently baked into the reserve calculations may not materialize. That would allow JPMorgan to release some of its reserves -- potentially billions of dollars -- back onto the income statement and therefore boost earnings.
4. Lower revenue, better profitability
As they are with a lot of banks, analysts are forecasting lower revenue and increased profitability for JPMorgan in 2021. The ultra-low-rate environment is going to keep cutting into net interest income, and Dimon said on the bank's third-quarter earnings call that "we're not going to do anything to protect the NII." What he means is that the bank is not going to deploy its excess cash into securities yielding very little return, which is probably the right move long-term. While the bank's fee income business segments should remain strong, after a record year in some areas like the corporate and investment bank, they will also likely normalize a bit in 2021.
But despite lower revenue, with much lower credit costs in 2021, the potential to release reserves back into earnings, share repurchases, and maybe some better loan demand in the back half of 2021, the bank's profits should still be much better than in 2020.
