JPMorgan Chase & Co



|JPMorgan Chase & Co. |(JPM - NYSE) |$111.47 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Previous Ed.: Mid-Quarter Update, Feb 23, 2018

Brokers’ Recommendations: Neutral: 50.0% (9 firms), Positive: 50.0% (9); Negative: 0.0% (0) Prev. Ed.: 10; 9; 0

Brokers’ Target Price: $120.92 (↑ $4.89 from the last edition; 13 firms) Brokers’ Avg. Expected Return: 8.5%

A flash update on 1Q18 Earnings was done on Apr 13, 2018.

Portfolio Manager Executive Summary

JPMorgan Chase & Co is a global financial services firm with assets worth $2.61 trillion and operations in more than 60 countries.

Trend of Broker Opinions: Broker sentiment on the stock is equally skewed toward positive and neutral stance, with 50.0% of the firms in the Digest group rating the stock positive and the remaining 50.0% neutral. None of the firms had negative ratings for the stock. Target prices provided by the firms range from a low of $96.00 to a high of $138.00 per share. The average came in at $120.92, implying a return of 8.5%.

Chief Investment Considerations:

▪ Diversified revenue mix

▪ Well positioned for organic growth

▪ Steady loan and deposit growth

▪ Rising interest rates

▪ Stable capital position

▪ Enhanced capital deployment

▪ Benefits from lower tax rates

▪ Persistent litigation issues

▪ Weakness in mortgage banking

▪ Muted investment banking performance

Positive or equivalent outlook – 9 firms or 50.0%: Given the overall improvement in the economy, these firms expect JPMorgan to benefit from its diversified revenue sources, loan and deposit growth, higher interest rates, lower corporate tax rates and lower level of mortgage-related litigation costs. Further, these firms believe that the company’s sound funding and liquidity position will continue to support profitability. Overall, they remain optimistic about the company’s performance, given its competitive positioning, healthy growth opportunities, ability to adjust to changing economic backdrop and capability to meaningfully deploy capital.

Neutral or equivalent outlook – 9 firms or 50.0%: These firms believe that JPMorgan’s fundamental strength and strong capital position would facilitate a stable core operating performance. Also, they believe that with the economic recovery, stabilization of revenues, continuous focus on gaining market share and increasing investments in franchise, the company will be able to grow organically. However, they remain concerned about the slowdown in mortgage originations and other macroeconomic headwinds. Though JPMorgan has resolved most of its mortgage-related issues, it still faces several other charges for its business conducts in the pre-crisis period.

April 20, 2018

Overview

Headquartered in New York, JPMorgan Chase & Co. is a financial holding company with assets worth $2.61 trillion and stockholders’ equity worth $256.2 billion as of Mar 31, 2018. With operations in over 60 countries, JPMorgan is one of the major financial service firms in the world.

JPMorgan organizes its business through five reportable segments.

▪ The Consumer & Community Banking (CCB) segment (constituting 44.9% of total net revenues in 2017) serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking, Home Lending and Card, Merchant Services & Auto.

▪ The Corporate & Investment Bank (CIB) segment (33.3%) offers a wide range of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities.

▪ The Commercial Banking (CB) segment (8.3%) provides lending, treasury services, investment banking and asset management services to corporations, municipalities, financial institutions and non-profit entities.

▪ The Asset & Wealth Management (AWM) segment (12.4%) provides services to institutions, retail investors and high-net-worth individuals. It offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity including money-market instruments and bank deposits. The segment also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services to corporations and individuals.

▪ The Corporate segment (1.1%) consists of Treasury & Chief Investment Office (CIO) and Other Corporate, which includes corporate staff units and centrally managed expenses.

More information on the company is available at .

The firms identified the following factors for evaluating the investment merits of JPMorgan:

|Key Positives |Key Negatives |

|Emergence of loan growth to enhance net interest income |Dismal mortgage banking performance amid higher interest rates will hurt fee|

|Improving rate scenario will gradually ease margin pressure |income growth |

|Stable capital position and strong liquidity will enable the company to |Legal expenses, though lower than before, will continue to weigh on |

|efficiently deploy capital |bottom-line growth |

|Expansion in emerging markets will lead to better growth opportunities |Debt underwriting will be adversely impacted by higher rates |

|Continued focus on expense management to support bottom-line | |

Note: JPMorgan operates on a calendar-year basis.

April 20, 2018

Long-Term Growth

According to the firms, JPMorgan’s organic growth prospects appear strong, especially beyond the near-term headwind of declining rate-sensitive businesses, as stronger commercial loan demand begins to benefit the top line. Further, there are ample organic growth opportunities from the company’s emerging market presence in investment banking and increasing market share in credit cards through product launches.

JPMorgan is focusing on increased automation with fewer employees. Also, the company continues with its efforts to reduce the size of the branches, given the increased usage of online banking and ATMs. While management is consolidating its branch network with continuous investments in technology in order to further improve its services, it intends to expand into new 15-20 markets in several U.S. states, by opening up to 400 new branches through 2023.

At its annual Investors Day conference in February 2018, JPMorgan set its medium-term targets of cost-to-revenue ratio of 55% (despite continued investments in franchise), return on tangible common equity (ROTCE) of nearly 17%, net payout ratio of 100% and Common Equity Tier 1 (CET1) ratio of 11-12%. Further, the company expects pre-tax income to be nearly $44-$47 billion over the medium term.

Additionally, JPMorgan has a solid balance sheet along with a decent loan loss reserve and stable liquidity position, which enables it to weather a difficult macro environment. The firms believe that the company's enviable capital and reserve positioning would enable it to continue investing in the franchise, which will help the company build long-term value.

The financial crisis had forced many larger regional banks to be less aggressive with respect to credit extension and evaluation of non-core businesses for disposition. Rather than focusing internally, JPMorgan continues to build and expand its position in the core businesses and is apparently holding significant market share in several of its operations. The firms expect the company to continue with its efforts to upgrade customer and employee base, which will enable it to generate higher revenues and earnings, going forward.

April 20, 2018

Target Price / Valuation

Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |50.0%↑ |

|Neutral |50.0%↓ |

|Negative |0.0% |

|Average Target Price |$120.92↑ |

|Maximum Upside from Current Price |23.8% |

|Minimum Upside from Current Price |13.9% |

|Upside from Current Price |8.5% |

|Digest High |$138.00↑ |

|Digest Low |$96.00↑ |

|Number of Analysts with target price/Total |13/18↓ |

Factors like shape of the yield curve, acceleration in nonperforming assets, deterioration in economy remain some of the major risks to the firms’ earnings estimates, ratings and price targets.

Recent Events

On Apr 13, 2018, JPMorgan announced 1Q18 results. Amid an expected weakness in investment banking, strong trading results, higher rates and lower tax rate drove earnings of $2.37 per share, which handily outpaced the Zacks Consensus Estimate of $2.28. The reported figure was up 44% from the prior-year quarter.

Results in the reported quarter included 11 cents per share of mark-to-market gains related to the adoption of new recognition and measurement accounting guidance for certain equity investments previously held at cost.

Decent loan growth (driven mainly by improved wholesale loans) and higher interest rates aided net interest income growth. Further, higher equity trading income (up 26%) and fixed income trading (up 8%) supported the top line. Additionally, mortgage banking income witnessed a rise, driven by growth in residential mortgage loans, partially offset by fall in mortgage origination volume.

Apart from these, the reported quarter recorded a decrease in provision for credit losses, mainly attributable to reserve release in the Wholesale portfolio.

As expected, investment banking performance slumped during the quarter. While advisory fees witnessed a modest rise, both equity and debt underwriting fees declined. Further, higher operating expenses was an undermining factor.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was decent. All segments, except Corporate, reported a rise in net income on a year-over-year basis.

Among other positives, credit card sales volume was up 12% and merchant processing volume grew 15%. Further, Commercial Banking average core loan balances grew 6% and Asset Management average core loan balances rose 12%.

Net income was up 35% year over year to $8.7 billion.

Revenues

In 1Q18, net revenues (on managed basis) were $28.5 billion, up 10% year over year (y/y). On a reported basis, it was $27.9 billion, increasing 12% y/y.

NII was $13.3 billion, up 10% y/y. The rise reflected loan growth and the impact of higher rates, partially offset by lower Markets NII.

Non-interest revenues grew 13% y/y to $14.6 billion. The rise was mainly driven by higher Markets revenues, decline in Card net acquisition costs, higher auto lease income and higher management fees in the AWM segment, partially offset by lower investment banking fees.

Provision for credit losses was $1.2 billion, down 11% y/y. Higher consumer provisions were more than offset by reserve releases in Wholesale loan portfolio.

Quarterly Segment Performance

Consumer & Community Banking (CCB)

Net revenues were $12.6 billion, up 15% y/y.

▪ Consumer & Business Banking recorded net revenues of $5.7 billion, a rise of 17% y/y. The increase was driven by higher deposit margin and growth.

▪ Home Lending reported net revenues of $1.5 billion, down 1% y/y. The fall was due to a decline in portfolio loan spread and production margin compression, partially offset by increase in net servicing revenues.

▪ Card, Merchant Services & Auto’s net revenues totaled $5.4 billion, up 18% y/y. This was largely driven by higher auto lease volumes as well as increase in NII on higher Card loan balances and margins.

Corporate & Investment Bank (CIB)

Net revenues grew 9% y/y to $10.5 billion.

▪ Banking Fees were $3 billion, a fall of 3% y/y. It consisted of Investment Banking revenues of $1.6 billion (down 7%), Treasury Services revenues of $1.1 billion (up 141%) and Lending Revenues of $302 million (down 22%).

▪ Markets & Investor Services revenues increased 15% y/y to $7.5 billion. The unit consists of Fixed Income Markets revenues of $4.6 billion (up 8%), Equity Markets revenues of $2 billion (up 26%) and Securities Services revenues of $1.1 billion (up 16%). Additionally, Credit Adjustments & Other revenues were a negative $50 million compared with negative revenues of $222 million in 1Q17.

Commercial Banking (CB)

Net revenues were $2.2 billion, a rise of 7% y/y, largely driven by higher NII.

▪ Revenues from Middle Market Banking were $895 million, jumping 14% y/y.

▪ Revenues from Commercial Term Lending were $352 million, down 4% y/y.

▪ Revenues from Corporate Client Banking totaled $687 million, reflecting a rise of 3% y/y.

▪ Revenues from Real Estate Banking were $164 million, jumping 22% y/y.

▪ Revenues from Others amounted to $68 million, up 1% y/y.

Asset & Wealth Management (AWM)

Net revenues were $3.5 billion, an increase of 7% y/y. The rise was driven by increase in management fees, strong banking results and higher market levels.

▪ Asset Management revenues were $1.8 billion, a rise of 6% y/y.

▪ Wealth Management revenues were $1.7 billion, up 7% y/y.

Corporate

Net revenues were negative $232 million compared with negative revenues of $25 million in 1Q17.

▪ Treasury and CIO net revenues were negative $38 million compared with negative revenues of $7 million in 1Q17.

▪ Other Corporate net revenues were negative $194 billion compared with negative revenues of $18 million in 1Q17.

Overall Outlook

The company expects new revenue recognition accounting rule to increase 2018 revenues by nearly $1.2 billion, with the most impact on the AWM segment.

As a result of the change in tax rate due to TCJA, the company expects a reduction in tax-equivalent adjustments, a fall in managed revenues by roughly $1.2 billion on an annual run-rate basis.

Some firms believe that higher rates and more secular market trends will provide an upside to the company’s revenue growth.

Margins

Non-interest expenses (managed basis) were $16.1 billion in 1Q18, up 5% y/y. The rise was primarily due to higher compensation expenses, auto loan depreciation and volume-related transaction costs in CIB Markets.

Outlook

Following the implementation of TCJA, management expects effective tax rate to be nearly 20% in 2018.

The company expects new revenue recognition accounting rule to increase 2018 expenses by nearly $1.2 billion, with the most impact on the AWM segment.

As a result of the change in the tax rate due to TCJA, the company expects a reduction in tax-equivalent adjustments, thus decreasing managed expenses by roughly $1.2 billion on an annual run-rate basis.

Earnings per Share (EPS)

In 1Q18, net income was $8.7 billion or $2.37 per share compared with $6.4 billion or $1.65 per share in 1Q17. Earnings in the reported quarter included 11 cents per share of mark-to-market gains related to the adoption of new recognition and measurement accounting guidance for certain equity investments previously held at cost.

Outlook

Some firms raised their 2018, 2019 and 2020 EPS estimates based on 1Q18 performance and expectations of gains from the lower tax rates, improvement in efficiency and higher share buybacks.

Balance Sheet/Credit Quality/Capital Structure/Others

Balance Sheet

As of Mar 31, 2018, total assets were $2,609.8 billion (up 2% y/y), deposits totaled $1,487 billion (up 4%), total loans were $934.4 billion (up 4%) and shareholders’ equity was $256.2 billion (relatively stable).

As of Mar 31, 20189, for the Asset & Wealth Management segment, total client assets came in at $2.79 trillion, up 9% y/y. Assets under management were $2.01 trillion, up 10% y/y, as a result of higher market levels and inflows in long-term products, partly offset by outflows in liquidity products. Custody, brokerage, administration and deposit balances were $772 billion, up 9% y/y.

Outlook: For 2018, management projects C&I loans to grow in the mid-single-digit rates.

Asset Quality

In 1Q18, net charge-offs (NCOs) were $1.3 billion, down 19% y/y. Also, non-performing assets (NPAs) totaled $6.4 billion as of Mar 31, 2018, down from $6.8 billion as of Mar 31, 2017. Further, allowance for loan losses to end-of-period loans retained was 1.25%, down from 1.31% in 1Q17.

Outlook: Some firms don’t expect NPAs to remain at the current low levels and gradually rise in the quarters ahead.

Capital Structure

JPMorgan’s Tier 1 capital ratio was 13.5% as of Mar 31, 2018 compared with 14.1% as of Mar 31, 2017. Tier 1 common ratio was 11.8% compared with 12.4% as of Mar 31, 2017.

JPMorgan has been relentlessly contributing to the economic recovery of small businesses and communities. In 1Q18, the company raised capital of $331 billion for its corporate clients and non-U.S. government entities, $5 billion for small businesses in the United States, $55 billion of credit for consumers, along with $217 billion of credit provided for corporations. The company’s activities like lending or providing credit of $9 billion to not-for-profit and government entities including states, municipalities, hospitals and universities have had a meaningful impact on communities.

Capital Deployment Activities

In 1Q18, JPMorgan repurchased 41.4 million shares at an average price of $112.78 per share. This was part of the company’s 2017 capital plan.

On Mar 20, 2018, JPMorgan announced a quarterly dividend of 56 cents per share. The dividend will be paid on Apr 30, to stockholders of record at the close of business on Apr 6.

On Jan 31, 2018, JPMorgan paid a quarterly dividend of 56 cents per share to stockholders of record at the close of business on Jan 5.

April 20, 2018

|Coverage Team |11A |

|QCA |Kalyan Nandy |

|Lead Analyst |Swayta D. Shah |

|Copy Editor |Proma Bhattacharjee |

|Content Ed. |N/A |

|No. of brokers reported/Total brokers |18/18 |

|Reason for Update |Earnings |

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April 20, 2018

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