Thanks, new tax code.
Action Alerts Plus holding JPMorgan Chase & Co. (JPM - Get Report) increased its profitability target as the U.S. bank prepares for a windfall from the recently enacted tax cuts and ongoing Federal Reserve rate increases.
The medium-term target for return on tangible common equity -- a key measure of profitability -- increased to 17% from 2017's target of 15%, the New York-based company said Tuesday in a presentation on its website. The forecast assumes lower tax rates as well as rising net interest income, given the bank's plan to reduce deposit rates on bank accounts slower than the speed at which loan rates are rising.
JPMorgan also said it will pay out roughly all of its income to shareholders this year in the form of dividends and stock buybacks. Regulators have loosened pressure on banks to increase the amount of capital they hold to guard against loan defaults and other losses, allowing them to return more to investors. JPMorgan said its ratio of common equity to risk-adjusted assets, the most basic measure of capital strength, will drop to a range of 11% to 12% in the medium term, from 12.1%.
Loans will grow 6% to 7% in 2018, slower than last year's pace of 9%, according to the presentation. Expenses will drop to about 55% of revenue from 56% in 2017.
Most of the bank's forecasts were in line with analysts' forecasts prior to Tuesday's release.
JPMorgan is expected to save almost $4 billion a year from the tax cuts, even assuming zero growth in pretax profit from 2017 levels. That works out to about $20 billion over five years. The bank's effective tax rate will drop to an estimated 19% in 2018 from 32% last year.
But in Tuesday's presentation, JPMorgan said its pretax income could climb to a range of $44 billion to $47 billion from about $40 billion in 2017.
Net interest income should climb to a range of $54 billion to $55 billion this year, up from $51.4 billion in 2017, while non-interest revenue could climb by 7% from $52.2 billion last year.
The improved earnings would come even as CEO Jamie Dimon said last month he plans to spend $20 billion over five years to raise wages for employees, lend more in low-income communities and increase philanthropic donations. He also wants to open 400 branches in new markets where the bank doesn't currently operate, including big cities like Washington, Boston and Philadelphia.
Dimon has insisted that the added expenses should be viewed as investments that will fuel long-term profit growth.
The extra spending "may very well bite into some of that" tax savings, Dimon told investors on a Jan. 12 conference call. "So be it. That's what's we're supposed to do. We're a bank. We're supposed to help support and grow communities. And it will enhance our growth in the future, too, by the way. So this isn't like a giveaway."
Dimon, who got a 5.3% raise last year in total compensation to $29.5 million, even as the company's workforce on average got no pay increase, recently agreed with the board of directors that he will remain at the helm for another five years.