JPMorgan Chase (NYSE: JPM) stock slid 6.5% Monday-Wednesday amid fears about a potential drop in credit-card interest rates and a couple weak elements of the bank’s earnings report.
But these worries appear overblown, with JPMorgan, the country’s largest bank, remaining best in class.
On Monday, President Trump said he’s capping credit card rates at 10% for a year. The industry’s average maximum currently stands at 22-23%. So a reduction of that magnitude would mean a big earnings hit for credit card issuers like JPMorgan. But Congress must approve any cut, and it will see substantial lobbying from banks if it addresses the issue. So approval isn’t assured.
As for earnings, JPMorgan took a $2.2 billion charge for potential loan losses on the Apple (NASDAQ: AAPL) credit card program that it’s buying from Goldman Sachs. (NYSE: GS). Obviously a charge isn’t good in and of itself. But Apple credit cards may prove to be a winner for JPMorgan.
“The card should fold nicely into the bank’s massive credit card portfolio, increasing net balances by about 7.6%,” wrote Morningstar analyst Sean Dunlop. And JPMorgan plans to launch a new Apple Savings account. “JPMorgan adds a key corporate relationship and should be able to profitably grow the Apple Card program in a way that Goldman failed to.”
Investment banking slump
The other negative in JPMorgan’s earnings report: Investment banking fees fell 5% in the fourth quarter from a year ago, trailing the bank’s forecast. Part of that decline stemmed from delays in closing mergers and acquisitions until this year. But bank officials acknowledged that there’s more to it than that.
“Our performance was not what we would have liked,” CFO Jeremy Barnum said in the earnings conference call Jan. 12. “You can be assured that we are looking at that.” JPMorgan has successfully dealt with its problems in the past, and this doesn’t appear to be a big one.
Overall, the bank’s earnings performance was strong in the fourth quarter, with a 7% increase in revenue from a year earlier.
So it’s no surprise that analysts see good things ahead for JPMorgan. Dunlop predicts a five-year compound annual growth rate of 3.5% for operating income and 8.3% for earnings per share.
“JPMorgan is arguably the dominant bank franchise in the U.S.,” he said. “With leading positions in investment, commercial, and retail banking, as well as valuable credit card, asset-
and wealth-management businesses, it is a force to be reckoned with.”
The author owns shares of JPMorgan.
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