JP Morgan (JPM) and Citigroup (C) both reported their calendar Q1 ’24 financial results last week, on Friday, April 12th, 2024.
What follows is a quick summary of their respective quarters as well as how the stocks look post-earnings.
JP Morgan:
JP Morgan fell hard after their Q1 ’24 earnings release, which was probably more of a function of the rally the stock has seen since its $100 low in late 2022, rather than any issues around their quarter or the guidance for 2024.
Coming into the quarter, according to this blog’s technician (@garysmorrow on X) , even if JPM falls to the November ’21 high in the stock of $172 – $173, that would represent just a 13% – 14% correction for the stock, which is likely badly needed given the rally in JPM from $140 on November 1 ’24 to $200 by late March ’24.
There is no question some of the steam had to come off the stock given it’s Q1 ’24 total return of 18.5%.
Fundamentally, JPM’s quarter was fine: net revenue rose 11% as EPS rose 13% y/y. Personally I thought the “corporate and investment bank (CIB) would have been a little stronger, (32% of total JPM net revenue and 35% of net profit) but revenue was flat while operating profits rose 8% yoy. The commercial bank was stronger in Q1 ’24 (9% of net revenue and 14% of operating profit), rising 13% and 39% yoy.
Morningstar noted that net interest income (NII) and trading revenue helped the quarter, and also noted that JPM’s “asset sensitivity” (duration of assets on JP balance sheet) will help NII through the rest of the year as Treasury yields rise.
JPM’s 2024 and 2025 EPS estimates of $16.12 and $16.37 both were increased after the quarter, 1.5% and 2.5% respectively, after the results and conference call, which is consistent with the NII commentary and the rising Treasury yields.
JPM guided in the Q4 ’24 call to $88 billion in net interest income in 2024, which has now been increased to $90 billion.
Credit looked very good in the quarter, and with the economic data, there is no reason to expect a dramatic change in loan loss provisions (LLP).
Both forward EPS and revenue estimates for 2024 and 2025 increased for JPM after the results.
JPM Valuation: this blog’s internal model values JPM at $213, while Morningstar values JPM around $168, which averages $193, so if the stock does dip into the low $170’s or the November ’21 previous highs, that’s a 10% discount to “average” value and a 20% discount to this blog’s fair value.
Expected “average” EPS growth over the next 3 years is likely too low at an expected 3% per year. The average PE today is 11x. Average revenue growth expected for the next 3 years is just 2%. This blogs JPM earnings preview talked about the tough compares in ’24 vs ’23 but if the capital markets stay robust and credit stays contained, the forward estimates should move higher.
Book value and tangible book value are the priciest amongst the big banks at 1.7x and 2.0x respectively.
There are cheaper banks out there in the big bank universe, but none operated better.
Jamie Dimon’s leaving and succession plans could be an issue.
Citigroup:
Citi traded better after Friday’s earnings release, but the bank is still stuck with the typical problems. I found it interesting that Morningstar – over the next 3 – 5 years – doesn’t think Citi can generate better than 8% on ROTCE (return on tangible common equity). In Q1 ’24 Citi’s ROTCE was 7.6%.
Expense control was the big driver of the quarter as revenue rose 3%, but EPS fell 28% yoy, even though EPS generated a big upside surprise. Fee income and investment banking revenue helped revenue.
You can imagine with the layoffs (headcount has fallen to 237,000 from a peak of 240,000) that the quarter was noisy, and (“ex” this and “ex” that) it’s harder to get a clear picture of Citi’s ongoing operations and growth.
Citi does have an internal goal of 11% – 12% ROTCE which they put out to the Street, but the bank didn’t get their this quarter, and Morningstar has doubts about Citi reaching that level.
In this blogs earnings preview, we showed a longer-term chart of Citi and it’s repeated run up to the $80 level and dropping back down. No question Citi will benefit from a lower fed funds rate if the Fed moves, but that’s getting priced further out each week.
This blog earnings based valuation model puts a fair value on Citi at $55, while Morningstar values C closer to $68.
Reading the analyst notes there is clearly a need or want for Citi to reduce expenses further. The bank did say they were done with headcount reductions, but analysts may want more in the way of “expense rationalization”.
The bank is still a “show me story”. With JPMorgan, you get a great operator but the bank is valued that way, and with Citi you get a lot of lingering issues, and at 0.60x book value and 0.67x tangible book value, it too is valued that way.
Pick your poison.
Summary / conclusion: If Citi pulls back into the low $50’s more shares will be added particularly if the Fed odds of a rate cut improve, but JPM is clearly the “best-of-breed” of what’s left after 2008.
The banking system in general seems to be in very good shape: the end of zero interest rate policy (ZIRP) means banks are earnings higher income from the bond and loan portfolios, and credit seems to be in very good shape. Last week, even in the publicly traded high-yield market, credit spreads narrowed again, and are nearing +300 for the below-investment grade asset class, which definitely helps the banks. Fee income businesses performed well at both banks too.
Citi is probably the more “defensive” bank of the economy should slow suddenly and credit costs start to rise at banks, but JPMorgan is the better performer when all is right with the US economy and credit costs as the data reflects currently.
None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve loss of principal even over short periods of time. Capital markets and economic data can change quickly for both the good and the bad. All EPS and revenue data is sourced from LSEG.
Thanks for reading.