JPMorgan Chase: Crisis Is Not Found Here

JPMorgan Chase (NYSE:JPM) investors have likely gotten their opportunity to buy more shares over the past week as the fallout from the failure of Silicon Valley Bank (SIVB) intensified.

We cautioned investors in our previous update that it wasn't time to be greedy yet, even as JPM took off post-earnings. Accordingly, JPM fell more than 11% from its February highs toward last week's lows. However, it wasn't a small setback relative to JPM's 5Y total return CAGR of 5.2%.

Investors sold bank stocks indiscriminately as financial stocks, represented by the Financial Sector Select SPDR ETF (XLF) and the NASDAQ KBW Nasdaq Bank Index (BKX), were hammered.

The extent of the selloff led to "more than 90% of S&P 500 Financial sector stocks [closing] at a 1-month low" recently. Such pessimism is highly unusual and is "typically associated with panic-driven events like the 1987 crash, 9/11, 2011 debt downgrade, or COVID crash."

As the US pre-eminent banking institution, with $3.67T in total assets as of the end of 2022, we believe pessimism over its financial standing is overblown.

JPMorgan reported total deposits worth $2.34T, its primary funding source. Of this, its Consumer & Community Banking division accounted for $1.13T. Moreover, its total uninsured deposits of $137.9B, accounting for just 5.9% of its deposit base, demonstrated the risks of a significant outflow are low.

Moreover, JPMorgan has significant liquidity, with its cash and equivalent amounting to $540.5B. Hence, we believe it's clear why CEO Jamie Dimon & team are highly regarded in banking, with a relatively low risk of failure.

Furthermore, the bank has managed its securities portfolio much better than SVB. Silicon Valley Bank did itself no favors by misjudging the asset-liability mismatch in its long-duration securities and short-term deposits portfolio. Hence, the performance of CEO Greg Becker & his team was highly questionable, as regulators are probing SVB's lack of robust risk management.

In contrast, duration risk management is front and center in JPMorgan's firmwide risk management framework, as it stressed:

Treasury and CIO seek to achieve the Firm's asset-liability management objectives generally by investing in high-quality securities that are managed for the longer term as part of the Firm's investment securities portfolio. Treasury and CIO also use derivatives to meet the Firm's asset-liability management objectives. - JPM 10-K

JPM has a highly reasonable securities exposure relative to its asset base for its available-for-sale or AFS and held-to-maturity or HTM portfolios.

Accordingly, JPM reported AFS securities at amortized cost of about $216.2B, with a fair value of $205.9B at the end of 2022. Its loss ratio of 4.8% is reasonable and more than adequately met by its liquidity profile.

The bank also reported HTM securities at amortized cost of $641.5B, with a fair value of $594.5B.

Both portfolios represented 23.3% of JPMorgan's total asset base. Given its substantial liquidity, the bank also doesn't seem to face any urgency to liquidate its AFS portfolio.

Moreover, it has managed its asset-liability challenges very well compared to SVB. For example, JPMorgan reported an average yield of 3.5% on its AFS portfolio and 2.25% on its HTM portfolio at the end of 2022.

In contrast, SVB reported an average yield of 1.51% on its AFS portfolio and 1.63% on its HTM portfolio for FY22.

Therefore, we believe it's clear why JPMorgan deserves to be a core holding for bank investors, even as they navigate opportunistic buys in the hammered regional banking stocks.

JPM stock last traded at an NTM P/E of 10.5x, still below its 10Y average of 11.5x. However, it's above its peers' median of 8.1x (according to S&P Cap IQ data), given the battering seen in the sector.

With that in mind, investors looking for more speculative reward/risk opportunities might not find it in JPM, as it suffered less in the recent selloff.

Coupled with its premium valuation, we don't think investors need to be too aggressive.

Still, we like the setup following its steep pullback and believe an opportunity for JPM investors to add exposure is timely and appropriate.

Rating: Buy (Revised from Hold).

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