JPMorgan downgraded on valuation, while Bank of America shines as top pick: analyst

By Steve Gelsi

Wolfe Research cuts JPMorgan to peer perform and highlights Bank of America as an outperforming stock

JPMorgan Chase & Co. on Monday drew a downgrade to peer perform while Bank of America Corp. was highlighted as a top pick at Wolfe Research before the big banks deliver profit updates in the coming days.

With a rise of 20.4% so far this year, JPMorgan Chase (JPM) has outperformed the 16.7% gain by the S&P 500 SPX.

This stock's strong performance was cited by Wolfe Research analyst Steven Chubak as a reason to take "some chips off the table" due to the stock's higher valuation.

Higher-for-longer interest rates are also weighing on the bank's profit growth prospects, he said.

Chubak cut its view on JPMorgan Chase to peer perform from its earlier rating of outperform even though "JPM remains the largest and most well-run bank on the planet, street estimates are much too low, [and] excess capital remains best-in-class."

While JPMorgan Chase has traditionally distinguished itself as a "flight-to-quality beneficiary" that has been more adept than peers at navigating a challenging macro backdrop, it's still exposed to risks in lower net-interest income as "froth" dampens growth over the medium term, Chuback said.

During the bank's annual meeting in May, Chief Executive Jamie Dimon said that the company's stock is too expensive for stock buybacks, Chubak noted. JPMorgan has recently been trading at about 2.4 times its tangible book value.

JPMorgan Chase will report its second-quarter profit on Friday, along with Citigroup Inc. (C) and Wells Fargo & Co. (WFC).

Also read: JPMorgan Chase, Citi and Wells Fargo earnings to follow relative strength in their stocks

Meanwhile, Chubak reiterated an outperform rating for Bank of America Corp. (BAC) and said the bank is a top pick due to its relatively low valuation.

"We believe the Street is much too conservative in modeling BAC's net interest margin/net interest income," he said.

Bank of America has benefitted from a combination of a repricing of the securities on its balance sheet, as well as maturing hedges on its loans as well as a runoff of high-cost liabilities, he said.

These factors are expected to boost its net interest margin.

"Higher earnings per share potential is not adequately reflected in shares," he said.

Among other moves by Wolfe Research ahead of the second quarter include a downgrade of State Street Corp. (STT) to underperform from peer perform. The financial firm faces headwinds in net interest income, weaker fee growth, and lower amounts of excess capital for potential stock buybacks, Chubak said.

"We expect [State Street's] earnings per share growth will be constrained over the next couple of years," he said.

Wolfe Research also downgraded Raymond James Financial Inc. (RJF) to peer perform from outperform due to a projected slowdown in profit growth even though "management continues to execute well."

Chuback reiterated outperform ratings on Charles Schwab Corp., (SCHW) saying it offers "compelling upside over the next 12 months" and calling it a top pick

He also reiterated an outperform on LPL Financial Holdings Inc. (LPLA) as another top pick that "continues to deliver the strongest earnings per share growth across our coverage ... and screens quite attractively on valuation," Chubak said.

Also read: Analysts praise banks and puzzle over Fed after stress tests

-Steve Gelsi

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07-08-24 0930ET

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