JP Morgan (JPM)
Q2 Results - As good as it gets?
Introduction
The US quarterly results season for the three months ending June 30th started two weeks ago.
We will try and write-up the results of the 40 companies we have covered in this Substack. However, time pressures mean we will not be able to cover all of them.
This last quarter has seen a steady rise in the market indices since about 20th April. The US dollar has been weak, and the US tariff issue was effectively postponed for 90 days but has returned as a threat and a risk.
It will be interesting to see the results to see the impact of tariffs (if any).
Countries with meaningful overseas income will see a boost in their results due to the weakness in the dollar.
JP Morgan
We have looked at JP Morgan (JPM) a few times. These reports can be found here, here and here.
We revisited the stock again in the light of Q1 2025 Results. That report can be found here.
JPM is one of the largest and most successful global banks. There was a Bloomberg headline last week suggesting its market capitalisation is greater than the next three US rivals combined.
In the last 23 years, JPM stock has given a CAGR total return of 12.2%. This is less than the 15% that we like to target.
In the last five years, the CAGR total return has been 27.4%. JPM has performed well in the post-Covid recovery.
With JPM, the numbers are often very large. Total quarterly revenue was $42bn (!) a decline of nearly 12% (y/y). Net Income was $15bn with a ROTCE of 21%.
Q2 2024 numbers had included significant non-recurring accounting gains, making the y/y comparison unfavourable. If we adjust for that, Q2 2025 underlying revenue has grown at single digit percentage rates.
In 2024, JPM had record revenues ($166bn) and record net income (at $ 58.5bn). Progress from these elevated levels is hard to achieve.
JPM’s three business segments are
1. Consumer and Community Banking (CCB)
2. Commercial and Investment Bank (CIB)
3. Asset and Wealth Management (AWM)
CCB, CIB are much larger than AWM.
CCB revenues increased 6% (y/y) to $18.8bn
CIB revenues increased 8.3% (y/y) to $ 19.5bn
AWM revenues increased 8.9% (y/y) to $7.76bn
This quarter, JPM reported net income of $15bn and EPS of $5.24 (See below).
Consumer and Corporate Banking (CCB)
CCB reported net income of $5.2bn on revenue of $18.8bn was up 6% (y/y).
The main source of growth was card services and auto, revenue which was up 15% (y/y). Auto originations were up 5% driven by higher lease volume.
Fund investment assets were up 14% (y/y) due to market performance and continued healthy inflows. Growth was more modest in other areas
Banking and wealth management revenue was up 3%.
Average deposits were down 1%.
Home lending revenue was down 5% (y/y).
Expenses of $9.9 billion were up 5% (y/y) only slightly less than the percentage growth in revenues.
Commercial and Investment Bank (CIB)
CIB reported net income of $6.7bn on revenue $19.5bn billion which was up 9% (y/y). Total CCB Expenses of $9.6bn were only up 5%.
The star was Markets which was up 15% (y/y). These gains were broad-based.
Fixed income was up 14%
Equities was up 15%,
Security services revenue was up 12%
Underwriting fees were up 12% primarily driven by a few large deals. Equity underwriting was down 6%.
Progress in other businesses was more modest
Investment Banking fees were up7%
Advisory fees were up 8%.
Payments revenue was up 3%.
Funding revenue was down 6%.
Asset and Wealth Management (AWM)
AWM reported net income of $1.5 billion with pre-tax margin of 34%.
Revenue of $5.8bn was up 10% (y/y) while expenses were only up 5% to $3.7bn.
Revenues were higher due to by growth in management fees on strong net inflows and higher average market levels, as well as higher brokerage activity and higher deposit balances.
Long term net inflows were $31bn for the quarter, led by fixed income and equities.
Highlights of the Earnings Conference Call
Some Key statistics
Return on Tangible Common Equity (ROTCE) = 21%.
Common Equity Tier 1 (CET 1) = 15.1% of total Risk Weighted Assets (RWA). CET1 Capital is $ 284bn.
Total Loss absorbing capacity is $560bn.
The CET1 Ratio of 15.1% is well above the minimum regulatory capital required by US regulatory authorities. As per the current Basle 3 rules on capital adequacy, JPM has significant excess regulatory capital and this excess will increase if the regulatory rules are relaxed, as is widely expected.
JP Morgan management argue they have “Fortress Balance Sheet”. It is difficult to argue with that conclusion.
2024 was a record year and revenues have grown since: therefore, current revenues and profits are at record levels. All segments are growing and there is little sign of distress among consumers and corporates. JPM is in a sweet spot. However, banking is a cyclical business and some economic downturn with a deterioration in the credit cycle is always round the corner.
JP Morgan CEO, Jamie Dimon has maintained a cautious stance on the U.S. economy for several quarters now and, after the results, he said accurate forecasts are a challenge because key shifts are apparent only in hindsight. While he expressed optimism about the health of the consumer, he reiterated concerns about tariffs and trade uncertainty, worsening geopolitical conditions, high fiscal deficits and elevated asset prices. The bank remains measured when making projections.
Bank supervision and Regulation
JPM Management believe the scale of supervision and regulation has increased greatly since the great financial crisis.
“I hear some time from some pundits that there's been relaxing of rules and regulations. There's been nothing but increasing them for the better part of fifteen years. They should take a deep breath step back, look at the system and answer the question, how can we make it better and stronger for the economy.”
The regulatory climate and regime has a big influence on their business decisions.
We also need to think carefully about you know, things that work outside the regulated perimeter might not work inside the regulated perimeter as well. We have learned some lessons. The regulatory environment right now particularly shapes our thinking on that front.
They believe regulators need to step back and look at the entire range of regulatory regimes rather than focus on just one area, such as the Basle 3 rules on Capital Adequacy.
I think it is very important that the regulators step back you look at the big picture now It's not just one thing. If you look at SOR, GCP, CCAR, Basel III, FSRT, the overlap, the duplication. Things like Silicon Valley Bank and First Republic[1] did not need to happen If you just modify some things and you create more liquidity, more loans, a safer system.
If there is deregulation and an easing of the capital adequacy rules, JPM shareholders will benefit from more permissive rules and the faster return of excess capital through dividends and stock buybacks.
The regulators impose an additional regulatory capital requirement on banks which are judged to be Global Systematically Important Banks (G-SIBs). JP Morgan has the highest G-SIB buffer of all banks at 2.5% of Risk Weighted Assets (RWA). As their RWA is $ 1.9trn. their G-SIB capital requirement is $ 47bn or 17% of their total CET1 Capital.
JPM believe this is particularly onerous as it penalises success. It affects banks that have grown faster and have been more successful and thus attained dominant scale.
We continue to feel very strongly that of all the things that are out there, one of the worst is G-SIB In the sense of both the original gold plating sort of deep conceptual flaws in the framework itself, and the failure to recalibrate it for growth since it was put into effect. I think one of the things that's maybe a little bit under discussed there is the extent to which it specifically creates strong disincentives for American banks to be strong and globally competitive.
Stress in mid-market corporate and consumer segment.
They were asked whether they were seeing signs of stress among mid-sized companies due to factors such as tariffs or a possible consumer slowdown.
We love the middle market business. You know, it drives a lot of business. We built I think five hundred bankers in innovation economy, -what Silicon Valley Bank used to do. We still have a huge addressable market, the middle market business. We provide not just lending, but payment services, custody services, asset management services, FX services. We continue to struggle to see signs of weakness. Our delinquency rates are also in line with expectations.
They were also asked about growth in consumer credit and the health of the consumer.
While there are nuances around the edges, could credit is primarily about labour market. And in a world with 4.1% unemployment rate, just going to be hard, especially in our portfolio, to see to see a lot of weakness
Now it is true that if you look at the government's data. First half real consumer spending of this year versus second half of last year. Is down. Now it's still positive. It's still growing, but it's down. So it's kinda consistent, this sort of soft-landing narrative, which is also consistent with the sort of the GDP outlook that our economists are publishing.
Trading revenues were particularly strong. Markets revenues increased by 15% in Q2 2025. They were asked if they were surprised by it.
I think I personally was a little bit surprised by the resilience of the market's revenues in a second half of the quarter because I was sort of expecting a little bit of an offset between the two. But we worried a lot in certain moments about the revenues dropping back to some old run rate, and then we kinda stopped worrying.
it's gone up to new highs, so maybe we should be worried again. But a thing I like to remind myself of to your point is that all the revenues have gone up a lot. The resource usage has also gone up a lot. So we are deploying a lot of capital and other resources in this business, and we're earning good returns on it. But the revenue growth is not coming for free. So it's, you know, it's us running the place, basically.
In this answer, they are arguing it s not just benign market conditions that explain the buoyancy in trading revenues, but also the management’s active deployment of additional capital in the trading franchise.
Market revenues are seen as a little but suspect since they are subject to market cycles. However, JPM management indicated they are getting a little bit less worried about that.
So, you know, I mean, we've gotten over time a little bit more relaxed about talking about the markets business as something that has relatively uncorrelated and reasonably recurring revenues. And it seems to, if anything, more than not, countercyclical rather than procyclical. But it's still markets. Things can happen. It's volatile. There's risk taking involved.
It is not just trading. Conditions across all JPM’s business segments have been benign.
On the one hand, think if you look at the current market environment, it's hard to imagine a set of conditions that would be any better for us. Right? Rates are at a good level for us. Deal activity is high. Capital markets are very strong. Consumer credit is excellent, wholesale credit is excellent, Wealth management, asset management, mean, you know, essentially, every part of the company is firing. We're essentially firing on all cylinders some very minor exceptions of certain businesses that are extremely rate great sensitive, like home lending, where they're still doing a great job and what is a very tough market.
So when you see that, you're like, well, that's not normal. Normally, you would have some pockets doing a little better, some pockets doing a little worse. And that's part of what makes you think that it know, some aspects of this are maybe not sustainable.
Valuation of JPM stock
The management were asked about the deployment of excess capital. They will deploy it in businesses when warranted by the prospects of durable and profitable growth and they will continue to pay a rising dividend[2] However, they revealed they are a little bit reluctant to buy back shares at the current price.
I don't like buying back the stock at almost three times tangible book. Well, no one's gonna convince me that's a brilliant thing to do.
Summary
JP Morgan continues to perform well with record results in recent quarters. Credit conditions are benign, and the bank is said to be firing well across all cylinders. Is this as good as it gets. Is the cycle about to turn?
There are plenty of things for those with a nervous or pessimistic disposition to worry about. These include trade wars, tariffs, inflation, economic growth and so on. Negative developments on one or more of these factors could easily darken the current benign outlook.
At the current price of $292 per share JPM is trading on a one -year forward P/E Ratio of 14.6X. This is an earnings yield of 6.8%. This looks like a reasonable valuation for a company likely to grow revenues, net profits and EPS at 8%, 9% and 11% respectively, for the next few years, and likely to achieve an ROE in the 15% to 17% range.
The dividend yield is 2.1%, perhaps a little on the low side, but the dividend is likely to rise as it is quite well covered.
The forward Price to Book Value (P/B) and the forward Price to Tangible Book Value is 2.37X and 2.94X respectively and they look high. As the chart below shows the trailing P/B Ratio has trended higher and is currently close to a ten-year high.
JPM shareholders are likely to benefit from buoyant market conditions, a possible easing of capital requirements and regulatory burdens and increased dividends or share buybacks as “excess” capital is returned.
If you want to invest in banks, JPM is probably the best in class, and can safely be a part of your portfolio. However, as we noted in our note on JPM on 23 Jan 2025, there are various perfectly sensible reasons that investors give for not investing in banks. These can be found at the end of the article which can be accessed here.
Conclusions
From this valuation level, we believe the prospective returns on JPM stock over the next 5 to 7 years are likely to be closer to 7% to 10% rather than 15%. The 23-year CAGR total return has been 12.3%.
We have a small position in JPM stock, but we will not add to it.
[1] Two recent large failures of regulated banks,.
[2] Dividends per share have grown at a CAGR of 6.8% over the last five years while maintaining a dividend cover of about 4X.