JPMorgan (JPM) - Get JP Morgan Chase & Co. Report shares are getting crushed as large bank executives meet in Washington Wednesday. Its large cap banking peers are getting crushed as well, as the coronavirus will likely get worse before it gets better, putting the possibility of recession in many economies into the minds of investors.
The stock fell 3.4% to $97.13 a share Wednesday. It’s down 18.63% in the past five days, against the S&P 500’s decline of a bit more than 10%. Citigroup (C) - Get Citigroup Inc. Report and Bank of America (BAC) - Get Bank of America Corporation Report are down 22% and 19% in the past five days, respectively.
Here are the headwinds facing JPMorgan, specifically.
Not only is the coronavirus shutting down manufacturing plants in Asian and Europe and keeping consumers around the globe at home, but a huge fall in oil prices are especially unnerving for JPMorgan investors.
Investors expect the bank to make far fewer loans in 2020 than previously estimated, but JPMorgan sees 2.1% of its total loan revenue come in the form of oil and gas loans. Treats the second highest portion out of any large U.S. bank, with Citigroup number one. Oil prices are down 28% in the past five days.
Importantly, net interest income is just under 50% of total revenue for JPMorgan. Citigroup sees 3.2% of its total loan revenue come from oil and gas loans and is expecting net interest income to come in just above 50% of its total revenue for 2020. This all makes Citigroup slightly more sensitive to the coronavirus issue and oil demand plummet.
While the yield curve is not inverted, spreads are tight and all yields have plummeted, with the 10 year treasury now yielding just 0.7%. A one-two punch of lower loan volumes and falling net interest margins could see revenue and earnings estimates fall for big banks for 2020. They already have, as JPMorgan is now looking for a slight decline in revenue and earnings for the year. But as the its rages on and oil prices remain seriously pressured, analysts could sharpen their pencils once more.
JPMorgan is now trading at 0.9 times book value, which is historically cheap for the bank. That multiple may expand a bit for a moment in the near future if estimates fall again from here. But while some may view this moment in time as a buying opportunity — expecting 2021 comparables over 2020 to be strong — there’s one big risk. There could be a recession and economic fallout from the virus, as manufacturing plants and consumers ramp activity back up slowly in the second half of the year. That may pressure earnings multiples.
As if things couldn’t get any worse for JPMorgan, its beloved and strong-headed CEO Jamie Dimon is still recovering from heart surgery. The business world wishes him a solid recovery.
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