Analysis: JPMorgan Chase & Co. Downgraded to Neutral

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Odeon Capital analyst Richard Bove has downgraded JPMorgan Chase & Co.’s stock from buy to neutral, despite still considering it the “best bank in America.” While Bove believes that JPMorgan Chase should be a core holding in a bank portfolio, he points out several near-term negatives that could hinder the stock’s performance in the coming year.

Basel III Endgame Proposals

Bove highlights the Basel III endgame proposals currently under review by regulators as a significant hurdle. These proposals, originating from the global financial crisis, could potentially force banks to reduce their core lending activities and create operational challenges.

Bove states, “The rules will change bank profitability if they are put into effect. Since JPMorgan is the biggest bank in the country and the leader in multiple banking sectors, it is likely to be hurt more than other banking enterprises.”

Impact of Interest Rates

While JPMorgan has benefited from rising interest rates, enabling them to charge more for loans, Bove warns that lower interest rates may negatively impact the bank’s net interest income. If interest rates decrease, deposit costs will not drop in line with rates, resulting in a potential loss of up to $3 billion out of JPMorgan’s $80 billion net interest income level.

Additionally, Bove mentions that JPMorgan’s charge-off rate, which represents the percentage of money not expected to be repaid on credit cards or other loans, stands at 46 basis points—higher than industry averages. As these rates climb to historical norms, it will further impact earnings.

Other Factors Affecting Earnings

Another headwind JPMorgan faces is a lack of Wall Street dealmaking, which will adversely affect earnings. Alongside this, higher expenses contribute to the negative outlook.

Contrarian Stance

Richard Bove’s downgrade to neutral differs from the average analyst rating of overweight for JPMorgan Chase, according to FactSet data. While Bove sets a target price of $140 per share, analysts’ average target price for the bank is $171.83.

Stock Performance

On Thursday, JPMorgan Chase’s stock saw a 0.4% increase, and it has risen by 5.5% so far in 2023. The stock is one of the 30 stocks in the Dow Jones Industrial Average (DJIA), which has experienced a 1.9% increase this year.

Also read: Bank stocks outpace broad market into the red as higher bond yields impact the value of their portfolios

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