The Fed Adds Some Stress For Investors In The Largest Banks

This year’s Fed stress test for banks offered one fairly simple takeaway – it’s not the best time to be a money center bank. While super-regionals like Fifth-Third (FITB), PNC (PNC), Truist (TFC), and U.S. Bancorp (USB) had pretty undramatic results and capital market specialists like Goldman Sachs (GS) and Morgan Stanley (MS) came out well, it wasn’t such a smooth process for the largest money center banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan (JPM).

The net result of new stress capital buffer requirements is that the largest banks in the country are largely going to be on the sidelines when it comes to significant capital returns to shareholders for the next six to 12 months. While the underlying operating environment is still a good one for banks (loan growth, higher rates, et al) provided that the economy can thread the needle and avoid recession, the lower near-term capital return prospects are going to be another hurdle for these already-pressured shares to surmount.

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The Fed Adds Some Stress For Investors In The Largest Banks

JPMorgan Delivers, But Macro Factors Loom Large

Once again JPMorgan Chase (JPM) did its part, with a strong performance on the pre-provision line despite ongoing (and unexpectedly high) spread pressure. Unfortunately, macro issues are still significant, with investors worried about a still-fragile recovery, weak commercial borrowing, and election cycle uncertainties.

I continue to believe that JPMorgan shares are undervalued and offer a solid double-digit annualized long-term return. Even if rates never move higher (a highly unlikely event in my view), there’s a good argument for a mid-teens ROTCE that would support a fair value in the range of $110 to $115. With ongoing organic growth opportunities and some eventual uplift from rates, I think the fair value is higher still, and I continue to believe this is a good bank to own through all cycles

 

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JPMorgan Delivers, But Macro Factors Loom Large