Why JP Morgan Has 'One of the Strongest' Balance Sheets In Banking

In a report published Monday, Keefe, Bruyette & Woods analyst Christopher Mutascio upgraded the rating on JPMorgan Chase & Co. JPM from Market Perform to Outperform, while maintaining the price target at $77.

Following the upgrade, JPMorgan Chase was the only Outperform rated name “within our 11 large bank coverage universe,” analyst Christopher Mutascio said, adding that the current target price represented a total potential return of 16 percent.

In the report Keefe, Bruyette & Woods noted reasons for the upgrade as:

1. An attractive valuation, which was merely 9.7x the 2017 EPS estimate
2. Strong profitability measures, along with a robust balance sheet and high capital levels
3. High dividend yield in a low-interest-rate environment
4. Significant asset-sensitivity and leverage to a rising interest rates environment
5. The potential for “greater trajectory of capital deployment over time”

Mutascio pointed out that JPMorgan Chase was recording “a very respectable” ROTCE of 13-14 percent, while maintaining “one of the strongest balance sheets in the group with substantial capital, high liquidity and ample loan loss reserves.”

Mutascio explained that increased regulation had “de-risked” business segments and strengthened the balance sheet and was likely to “ultimately result in greater earnings consistency in various economic cycles, which should result in higher P/E multiples regardless of the negative impact to profitability ratios like ROTCE.”

JPMorgan Chase had shed business lines and significantly increased both capital and liquidity more than “most other large banks,” the report added.