JPMorgan Chase: Financial Winner

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) was the winner among the largest U.S. banks on Wednesday, with shares rising 3.5% to close at $49.28.

The broad indices all saw gains of over 1% after Federal Reserve Chairman Ben Bernanke continued to defend the central bank's "highly accommodative" monetary stimulus policy, this time before the House Financial Services Committee.

The Fed has kept the short-term federal funds rate in a target range of between zero and 0.25% since late 2008, and has been expanding its balance sheet through the monthly purchase of $85 billion in long-term securities. The purchases are meant to keep long-term rates at record low levels.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said at the start of the hearing that "after quadrupling its balance sheet and engaging in unprecedented mortgage-backed security asset purchases and creating an extended negative real interest rate environment, there is a growing consensus among economists that the Federal Reserve's road has led us to the monetary 'outer limits'."

"For diminishing marginal benefits the Federal Reserve's unconventional strategy creates considerable risks," Hensarling said. "If the balance sheet is not unwound at the right time and at the right pace, we could be looking at another deep recession, soaring inflation or skyrocketing interested rates."

Bernanke repeated his testimony from Tuesday's Senate Banking Committee hearing, saying that Fed policy "is providing important support to the recovery while keeping inflation close to the Federal Open Market Committee's 2 percent objective."

"Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods," he said, adding that "by raising employment and household wealth--for example, through higher home prices--these developments have in turn supported consumer sentiment and spending."

Also on Wednesday, the National Association of Realtors said that pending home sales rose in January, and had risen on a year-over-year basis for 21 consecutive months. The NAR's pending home sales index rose to 105.9 in January from a revised 101.3 in December, and from 96.7 in January 2007. NAR chief economist Lawrence Yun said in the group's press release that "favorable affordability conditions and job growth have unleashed a pent-up demand. Most areas are drawing down housing inventory, which has shifted the supply/demand balance to sellers in much of the country."

The KBW Bank Index ( I:BKX) rose over 1% to close at $54.03, with all 24 index components rising for the session.

JPMorgan Chase

Shares of JPMorgan Chase have returned 13% this year, following a 36% return during 2012. The shares trade for 1.3 times tangible book value, and for 8.5 times the consensus 2014 earnings estimate of $5.81, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $5.47.

JPMorgan's stock trades at one of the lowest multiples to forward earnings among large U.S. banks.

Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.44%.

JPMorgan Chase earned $21.3 billion, or $5.20 a share, during 2012, despite $6.2 billion in hedge trading losses within the firm's Chief Investment Office. During the company's annual Investor Day meetings on Tuesday, JPMorgan said that its annual earnings target "through the cycle" was $24 billion, or $6.28 a share, based on the share count at the end of 2012. The company's "normalized" annual earnings target is $27.5 billion, $7.20 a share.

The company also estimated that its Basel III Tier 1 common equity ratio would rise to 9.5% by the end of this year, and that it would have $28 billion in excess capital over regulatory requirements by the end of 2014, excluding share buybacks.

Bank of America Merrill Lynch analyst Erica Penala rates JPMorgan a "buy," and in a report on Wednesday called JPMorgan "one of our top picks as in our view, the stock should re-rate," with "modest multiple expansion."

"The return of share buybacks in 1Q13 and the March 2013 Fed stress test should re-establish JPM as a capital return story, and give investors confidence that it is on its way to Basel 3 compliance," she wrote.
The Federal Reserve will announce the results of its annual stress tests on the nation's largest banks on March 7. Then, on March 14, the Fed will announce the results of the Comprehensive Analysis and Review (CCAR) of the banks' capital plans through the first quarter of 2014.

Penala estimates that JPMorgan will raise the quarterly dividend to 32 cents, and said that her earnings estimates assumed $5bn in dividends and $10bn in share buybacks during 2013.

The analyst's price objective for JPMorgan Chase's shares is $55, and she estimates the company will earn $5.85 a share this year, with EPS rising to $6 in 2014.

JPM Chart JPM data by YCharts

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

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

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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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