JPMorgan Chase Undervalued: Analyst
NEW YORK (
) -- Shares of
JPMorgan Chase
(JPM) - Get Report
have underperformed peers such as
Bank of America
(BAC) - Get Report
and
Citigroup
(C) - Get Report
in the "risk-on" rally in early 2012.
But the stock's valuation remains attractive considering its "comfortable capital position, sizable deployment, and strong revenue generating capacity," Evercore Partners analyst Andrew Marquardt argued in a report Monday,
Marquardt retained his overweight rating on the stock, even as he lowered earnings estimates for 2012 to $4.67 from $4.76 on near-term weakness in the capital markets business. His price target of $42 implies an upside of just under 10% from Friday's close, which may seem modest if you don't view it in the context of a 10-year treasury yield of 2%.
JPMorgan's near-term earnings power as a percent of assets is a little lower than some of its large-cap peers such as
Wells Fargo
(WFC) - Get Report
,
U.S. Bancorp
(USB) - Get Report
and
BB&T
(BBT) - Get Report
because of its relatively outsized balance sheet and the drag from capital markets, the analyst notes.
The business is still very levered towards investment banking and trading, which not only faces headwinds out of Europe but is also being threatened by the Volcker rule, which is expected to curb bank's ability to make money from betting their own capital. Fixed income, which drives two-thirds of its trading revenue, is expected to be worst affected by the rule.
JPMorgan also continues to see some overhang in mortgage banking. While the foreclosure settlement resolves some of the uncertainty, the bank remains exposed to mortgage putback risk and most notably, fresh investigations by the newly set-up residential mortgage backed securities task force led by New York Attorney General Eric Schneiderman, which would conduct a joint civil and criminal criminal probe into the securitization process.
While Marquardt estimates that the putback risk is manageable at $4.6 billion net of disclosed reserves, he expects that the probes and lawsuits could lead to additional settlements with regulators in the future but the"size, timing, and potential other implications" of such probes "are unknown."
The bright spot which the market is underestimating is JPMorgan's "above-average flexibility to deploy capital". The analyst expects the bank's total payout ratio to rise to 76% from 72% in 2011, even as it continues to build capital.
JPMorgan is also likely to rationalize expenses further in 2012, which would boost profitability.
JPMorgan is also trading at a 24% discount to large-cap peers on a price to earnings basis. JPM is currently trading at 8.2 forward consensus estimates, compared to 9.1 for money center banks and 10.6 for large-caps. On a price-to-book basis, JPM shares are currently trading at 0.8,below long-term median of 1.3.
--Written by Shanthi Bharatwaj in New York
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