Bank stocks have been pretty volatile over the past few months, fueled by several factors -- interest rates, the economy, and high-profile bank failures, to name a few. But not all banks are the same. In fact, many large ones came through the past few volatile months in good shape and even managed to produce gains.
One of the best performers last quarter was JPMorgan Chase (JPM 2.51%), the largest U.S. bank. Where does this industry bellwether stand as we head into an uncertain second half of 2023? And more importantly, is this stock a buy?
Flight to safety
JPMorgan Chase was arguably the sturdiest large bank in the country before the regional banking crisis occurred in March, and it may have emerged from that turmoil even stronger. Let's take a look at a few key reasons that's the case.
First, at a time when many banks were seeing deposit outflows, JPMorgan Chase actually saw deposits increase 2% in Q1 compared to the previous quarter, rising to $2.4 trillion. This was due to concerns from customers at smaller and regional banks that there might be widespread deposit runs after the collapses of Silicon Valley and Signature banks. They were driven to larger institutions in what was a flight to the perceived safety and stability of a well-capitalized, highly liquid, heavily regulated bank like JPMorgan Chase.
This flight to safety helped JPMorgan Chase have a great first quarter. Net revenue rose 25% to $39.3 billion, driven by a 49% year-over-year increase in net interest income. At its investor day on May 22, JPMorgan Chase executives reported that the company is on pace to add 1.8 million accounts this year, more than last year's gain of 1.6 million.
Overall, net income was up 52% year over year and 15% versus the fourth quarter to $12.6 billion, driven by gains in consumer banking, commercial banking, and asset and wealth management. That offset declines in investment banking. Furthermore, its efficiency ratio -- or overhead costs as a percentage of revenue -- improved from 62% in Q1 of 2022 to just 52%, which is the best among large banks. (Lower is better.) And its overall return on equity -- another measure of management efficiency -- jumped from 13% a year ago to 18% at the end of the first quarter.
Growth opportunities
Although an economic slowdown or recession could be a headwind for JPMorgan Chase, it is prepared to weather short-term volatility that may come due to its operational efficiency, high Common Equity Tier 1 ratio of 13.9%, rising book value (up 9% year over year), and $1.4 trillion in cash and marketable securities. These are also strong pillars in its fortress-like balance sheet, designed to endure in difficult markets.
And there are certainly growth opportunities ahead for the company beyond any downturn we might have because the bank should see long-term gains in investment banking, trading, and asset management when the markets improve.
Another growth catalyst is JPMorgan Chase's purchase of First Republic Bank, which was taken over by federal regulators and promptly sold to JPMorgan Chase. The acquisition of this bank, which caters to high-net-worth clientele, is expected to boost JPMorgan Chase's annual profit by $500 million.
The company also expects to see more net interest income (NII) than originally anticipated, and the bank raised its forecast for NII to $81 billion for 2023, up from an earlier projection of $80 billion. The increase is due to the assumption that deposit and other funding costs will decline based on the expectation of interest rate reductions by the Federal Reserve later in the year.
Finally, the stock is relatively cheap, with a price-to-earnings ratio of about 10. That makes JPMorgan Chase an excellent buy right now, because it is in good shape to handle any short-term headwinds and is designed for long-term growth.
