Shares of US bulge bracket bank JPMorgan Chase & Co (NYSE:JPM) are a recommended buy for investors. Growth will be primarily driven by the combination of the favorable economic climate this US bank will face over the medium to long term combined with the operational framework the company has in place to successfully capture the opportunities this environment will present. Investors should maintain a close eye on US domestic policy changes - specifically focusing on Trump taking office as US President in January 2017, which will likely lead to political changes to benefit the US banking sector and nationwide corporate activity. Key to the scale of the growth potential of JP Morgan shares will be the specific details of these policies as they are implemented.
Further to this investors should monitor central bank policy closely. A strong indication of central bank forward sentiment has been revealed to investors in mid-December 2016 with the Federal Reserve Chairman Janet Yellen announcing a quarter-point increase in the benchmark rate to 0.75 per cent and suggesting a potential further three rate rises for 2017. JP Morgan is the largest US bank by assets and as rates rise a further steepening of the yield curve is forecasted as far out as the 10-year term which will lead to large gains in profits for the bank. The most recent financial reports from JP Morgan (Q3 2016) show the bank to be in a position of fundamental and strategic strength - delivering estimate beating performance in October of this year. Average core loans have soared 15% year on year and 2% quarter on quarter while retail banking deposits have achieved record year on year growth of 58 USD billion (11%). These elements of performance will be crucial to continued growth for 2017 as Federal Reserve rate policy and Trump's policy changes towards banks' use of capital will significantly impact profit margins directly related to lending.
JP Morgan's financial reports show promising performance and a strong balance sheet, supported by a vast asset base, reinforcing the buy recommendation on its shares. Overall, JPMorgan posted profits of 6.29 USD billion for Q3 2016 -an equivalent of 1.58 USD a share, significantly outperforming consensus analyst expectations of 1.39 USD per share. Although net income has fallen 6% year on year for Q3 2016 the bank has attributed this decrease to a higher income tax expense experienced in the most current quarter as compared to Q3 2015 in which the bank included a tax benefit of 2.2 USD billion (due to the resolution of tax audits and the release of deferred taxes). Meanwhile, net revenues were reported as 25.5 USD billion for Q3 2016, showing 8% growth year on year. In addition net interest income has grown 6% year on year to reach 11.9 USD billion - driven by loan growth and the net impact of higher rates and a partial offset by lower investment securities balances. The investment banking arm of JP Morgan concurrently drove gains - posting 10 percent growth in non -interest revenue. Providing further a promising signal to investors is the bank's consistency in achieving a dividend yield exceeding 2%.
The JPMorgan share price has rocketed over 25 percent since early November when Donald Trump was elected as the next US President. Trump's election win has signaled to the market that the US corporate sector will receive the political support it needs to stimulate growth and consequently US banking sector shares have achieved significant gains. Although the share price of JP Morgan stock has risen significantly in the past few months there is still growth potential for investment. The bank's share price has been significantly impacted by negative press of a number of legal cases taken against the bank over the past few years which have since been resolved. This has created uncertainty for investors and presents a buying opportunity at current levels. Further to this, if Trump repeals the Dodd Frank regulation, as is widely expected, JPMorgan will have increased flexibility in capital management and will be capable of generating higher profits.
Trump has made it clear throughout his campaign that he intends to execute policy changes to provide growth and momentum to the domestic business environment. Crucial examples include a reduction in corporate tax rates and spending on infrastructure. Both of these plans will lead to improved profits for JPMorgan. Trump's policies will lead to growth in the domestic US economy - boosting business operations of all scales, consumption spending, demand for lending and all-round economic, and subsequently banking, activity. All of these factors will contribute to growth of profits for JPMorgan. The scale of the bank means it is in a fortuitous position to capitalize upon the subsequent market dynamics and if Dodd Frank regulation is repealed returns will be sizably magnified. In addition, this drive in momentum for the US economy will result in dollar strengthening and a boost to profits in JPMorgan's global business activities.
The current economic and political environment combined with the across the board strong performance reported from the US bank is a sign of corporate strength and an ability of JPMorgan management to deliver future returns to investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.