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Bank Stocks and the Secret of NIM (Update 2)

According to data supplied by Thomson Reuters Bank Insight, the company's net interest margin narrowed to 2.37% in the fourth quarter from 2.40% in the third quarter, but JPMorgan Chase reported that its core net interest income -- excluding the effect of hedging derivatives and adjusted for taxes -- increased to $9.812 billion in the fourth quarter, from $9.790 billion the previous quarter.

During the fourth quarter, the company's average deposits grew by 3% sequentially to $1.134 trillion billion, while average total loans grew only slightly to $725.6 billion, and the average rate on loans during the fourth quarter was 4.83%, declining from 4.98% the previous quarter. Meanwhile, the average rate the company paid on interest-bearing liabilities was 0.64%, declining by only five basis points from the third quarter.

One fourth-quarter highlight for JPMorgan was that its average non-interest bearing deposits grew by 5.5% sequentially to $374.893 billion during the fourth quarter.

JPMorgan was able to grow its core net interest income, despite the declining margin, because the company's strong deposit growth allowed it to grow its core average interest-earning assets by 3% sequentially to $1.371 trillion during the fourth quarter. The company also saw strong growth within its Commercial Banking segment, where average total loans grew by 3% during the fourth quarter, to $128.2 billion, as of Dec. 31.

Following the company's earnings announcement on Jan. 16, Oppenheimer analyst Chris Kotowski said that JPMorgan Chase's fourth-quarter increase in net interest income indicated "that ongoing NIM pressure from low rates can be offset by loan growth." Kotowski rates JPMorgan "Outperform," with a 12 to 18 month price target of $62, implying 33% upside over Tuesday's closing price of $46.54.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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