This article, originally published at 9:27 a.m. on Tuesday, Feb. 28, has been updated with executive comments and market data.
Federal Reserve rate hikes and President Donald Trump's tax cuts and regulatory rollbacks could help JPMorgan Chase (JPM) , the largest U.S. bank, increase profit by more than 20% in the next few years, reinforcing a positive outlook for the financial industry that has driven up bank stocks by 56% over the past 12 months.
JPMorgan CFO Marianne Lake told analysts Tuesday at the New York-based bank's annual investor summit that the firm's net income could climb to $30 billion in the next two to three years, from $24.7 billion in 2016. About $4 billion of additional profit could come from higher lending margins, while $5 billion could come through loan growth, she said. Higher operating expenses are expected to reduce profit by $2 billion, while loan-loss expenses could cut $1 billion off the bottom line.
And that forecast doesn't include the impact of any tax cuts that Trump might push through, which could benefit JPMorgan's corporate rate while stimulating the economy, loan growth and trading activity, she said.
JPMorgan's profit forecast shows how benign the environment has become for the nation's biggest lenders, as the Fed prepares to accelerate rate increases this year while Trump pushes forward with plans to ease regulatory requirements imposed following the financial crisis of 2008. The KBW Nasdaq Bank Index, which tracks the biggest U.S. lenders, has surged since Trump's victory -- raising the bar for investor expectations from the financial industry over the coming years.
Trump has ordered Treasury Secretary Steven Mnuchin, a former executive of the New York-based bank Goldman Sachs, to compile a comprehensive report on the effects of government rules on the industry. The new president named JPMorgan CEO Jamie Dimon to a new Strategic and Policy Forum, a group of business executives who will advise on economic policies.
JPMorgan's leadership isn't fanatical about deregulation," Dimon said Tuesday. "We know there was a crisis. Capital, liquidity, transparency, controls, of course they should be enhanced. But at some point, you have to calibrate where you want to be with the system."
Banking regulations should be reevaluated based on principles including coherence, simplification and cost-benefit analysis, Lake explained.
Changes don't have to be "binary," she added. "It's not necessarily about less regulation. Important changes could be made in the way the rules are implemented."
JPMorgan says its return on tangible common equity, or ROTCE -- a common measure of profitability -- could rise to 15% in the coming years, from 13% in 2016. For comparison, competitor Wells Fargo (WFC) , had an ROTCE last year of 14%, followed by Bank of America (BAC) at 10% and Citigroup (C) with 8%.
"We continued to grow consistently even as we returned capital to shareholders," Lake said. Over the past 10 years, the lender's value increased from $18.88 a share in 2006 to $51.44.
Last year alone, JPMorgan returned $15 billion of capital to shareholders through dividends and share buybacks, the biggest payout among the six largest U.S. banks.
JPMorgan rose 0.2% to $90.58 on Tuesday afternoon, widening its year-to-date growth to 5%.
The company has benefited from last year's rally in oil prices, which helped many big energy producers to avoid restructuring debt or filing for bankruptcy. According to Lake, JPMorgan may start to reverse loan-loss reserves that were set aside as crude prices foundered in early 2016. At the end of 2016, JPMorgan had $1.5 billion of loss reserves against energy-company loans; a year earlier, the bank had set aside $815 million to cover oil- and natural-gas-related losses.
The trading environment also has improved.
Trump's election in November, on campaign promises of tax cuts, higher government spending and regulation cuts, led to a surge in Treasury bond yields along with a rally in the U.S. stock market, spurring a frenzy in transactions in late 2016.
While trading revenue in the first quarter of 2017 is likely to be "modestly" higher than a year earlier, the performance in March will prove critical, given the surge in that month in 2016, Lake said.
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