JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) posted respective Q4 EPS of $3.57 (vs. $3.10 est.), $0.85 (vs. $0.78 est.) and $1.10 (vs. 1.16 est.), reports Jason Clark, value investing expert and contributing editor to The Prudent Speculator.
Profits were fueled in large part by strong growth of net interest income of 48%, 29% and 23%, respectively, versus the prior year. But a major reason for the initial dip for the shares was uncertainty around the core lending profit in quarters to come, amid rising deposit costs and concerns that recession could impede loan growth and ramp credit costs.
But the future is always uncertain, while a perception of elevated uncertainty could add volatility to the markets. Each of these three banks possess trading operations that stand to benefit from lingering volatility as demonstrated in the latest quarter. Fixed income trading were high points for BAC and C last quarter as segment revenue grew 49% and 31%, respectively, year-over-year.
JP Morgan CEO Jamie Dimon suggested that a mild recession was the base case scenario in the bank’s economic forecast, but that consumer financial health remains in decent shape even as delinquencies approach pre-pandemic levels and charge-offs are expected to follow suit.
BAC CEO Brian Moynihan echoed, “Consumer deposit balances continue to show strong liquidity with the lower cohorts of our consumers continue to hold several multiples of balance that they have as a pandemic begin. These balances are drifting down, but they still have plenty of cushion left.”
We maintain our fondness for Mr. Dimon, who is willing to take a long-term view, investing in enhancing various capabilities, such as wealth management, even if there is limited near-term payoff. JPM shares trade at 11 times the consensus EPS estimate and sport a dividend yield of 2.8%. Our Target Price for JPM has been boosted to $186.
We also continue to like the multiple levers available to generate fee revenue that compliment Bank of America’s prominent consumer franchise. Notably, 56% of the $1 trillion in consumer deposits remain in no-interest checking accounts. BAC shares also look inexpensive to us as they trade for 10 times forward EPS estimates with a dividend yield of 2.5%. Our Target Price has been bumped up to $56.
The turnaround story continues at Citigroup as CEO Jane Fraser executes a plan of consumer business divestitures across Mexico, Asia and Europe, while addressing deficiencies in technology and internal controls.
Recognizing that this effort will take several years to play out, we like that shares trade for just 8 times forward earnings and for 60% of tangible book value, with a dividend yield of 4.1%. Our Target Price for C remains $87.