S&P Global Ratings has upgraded JPMorgan’s (NYSE:JPM) outlook to positive from stable. However, the ratings for the holding company (A-/A-2) and the operating company (A+/A-1) remain unchanged.
The boost in outlook stems from the strength of JPM’s extensive lending-to-trading business, which has surpassed its peers. In 2023, the company’s performance outpaced most of its competitors, showcasing robust business strength and prudent balance sheet management. The rating agency believes JPMorgan is well-positioned “to deliver peer-leading results under various macroeconomic scenarios.”
JPMorgan continues its focus on acquiring the industry’s top deposit franchise and fortifying its loan portfolio. Despite facing a challenging operating environment, the company has maintained strong loan and deposit balances over recent years, with a loans-to-deposit ratio of 55% as of Dec 31, 2023. While a potential economic slowdown may slightly impact wholesale loan demand, the company is expected to leverage its scale for decent loan growth moving forward.
The company’s dominant market position enables it to wield high pricing power, client selection, and economies of scale compared to other international banks. Despite the rise of mobile and online banking options, JPMorgan persists in expanding its footprint in new regions. In February 2024, it announced plans to open over 500 branches by 2027, solidifying its position as the bank with the largest branch network in all 48 states of the United States.
JPMorgan’s inorganic expansion efforts, including strategic alliances and acquisitions, are expected to bolster its top line and diversify revenues. The company’s net interest income (NII) and net yield on interest-earning assets have been on the rise over the past few years, supported by higher interest rates.
Despite the Federal Reserve’s anticipated interest rate cuts in the latter half of the year, JPMorgan’s profitability is projected to decline only modestly in 2024, with its NII expected to remain relatively flat.
With one of the highest CET1 ratios among U.S. global systemically important banks, along with a robust liquidity buffer, JPMorgan is well-positioned to weather potential regulatory challenges and trading losses.
The positive outlook reflects S&P Global Ratings’ expectation that JPMorgan will maintain peer-leading returns with solid balance sheet metrics and limited asset quality issues. Additionally, the agency anticipates no regulatory or legal issues for JPMorgan over the next two years.
Over the past three months, JPM shares have outperformed the industry, gaining 16.1%.
Regarding JPMorgan’s Commercial Real Estate (“CRE”) exposure, while CRE remains a significant risk factor across the banking industry, JPM’s exposure is deemed manageable, with CRE loans constituting only 10% of its loan portfolio. Therefore, S&P Global Ratings expects JPM to absorb the anticipated deterioration in asset quality, supported by its earnings capacity.
In contrast, concerns over exposure to CRE loans prompted S&P Global Ratings to downgrade the outlook on five regional banks in the United States to negative from stable. These include First Commonwealth Financial Corporation, M&T Bank Corporation (MTB), Synovus Financial Corp. (SNV), Trustmark Corporation, and Valley National Bancorp (VLY).
The move follows the collapse of Silicon Valley Bank and Signature Bank in early March 2023, which sparked a regional banking crisis, leading to deposit flights despite regulators’ emergency actions to restore confidence. Investors are now reevaluating the health of the industry due to renewed concerns over CRE exposure.
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