JPMorgan Chase finds itself in the unusual position on being on the defensive ahead of its Investor Day next week after a leading critic fired off a note wondering if the bank "has lost its fastball."
Wells Fargo analyst Mike Mayo asked—and answered—his question in a note to clients Sunday.
"Pre-investor day (May 23), the main question is whether JPM has lost its fastball. What's new is the degree that JPM is willing to sacrifice current returns for uncertain future growth. JPM's lead vs. peer is likely to narrow on returns, revenues, and efficiency," Mayo wrote.
"New efforts seem to cost more, take longer, and increase strategical, operational, and earnings risk. To us, JPM must prove that its superior standards for strategic and financial discipline are intact," he continued.
The bank declined to comment Monday when Barron's asked about the note.
JPMorgan Chase (ticker JPM) is the largest U.S. bank by market value and has long been the class of the industry.
That status has eroded somewhat since the bank said in January that expenses would rise more sharply than expected this year, limiting earnings growth. JPMorgan has cited competition from other banks and nontraditional financial companies.
And then the bank's first-quarter earnings report in April showed some deterioration in capital levels, prompting analysts to reduce estimates for share buybacks for 2022 and 2023.
JPMorgan shares, which were essentially flat in midday trading Monday after being off 1.1% in the morning, are near a recent 52-week low. The stock is down 25% this year and back where it traded in early 2018. The entire banking sector has been weak this year on economic concerns, but JPMorgan stock has lagged behind the industry with the SPDR KBW Bank exchange-traded fund (KBE) off 16%.
Shares took a hit in mid-January right after the bank said its noninterest expenses would be up 8% this year to $77 billion, about $4 billion above expectations, without providing many details. In the first quarter, the bank, like the rest of the industry, was hit by rising rates, which reduced the value of its bond portfolio and cut into its capital base.
"JPM like others had negative marks on its securities portfolio, but what's unique in our view is that it also rapidly grew its balance sheet at the same time," Mayo wrote.
The analyst noted that the bank's supplementary leverage ratio (SLR) fell to 5.2% in the first quarter, just 20 basis points above the minimum regulatory requirement and the smallest cushion among its peers.
One issue that the bank may address at its Investor Day, set for next Monday, is whether it can hit a targeted 17% return on tangible equity this year or 2023. Mayo sees the bank missing that target for the next four years.
Mayo has cut his stock buyback estimate in half and now sees $5.5 billion this year and $8 billion in 2023 against about $18 billion in 2021.
The bank finds itself in an unfortunate position of not being able to repurchase much stock at a time when its shares are trading more cheaply versus earnings and book value. The stock now trades for 11 times projected 2022 earnings and yields 3.4%.
Barron's wrote favorably on JP Morgan in April, arguing that investors had the opportunity to buy the best-run big bank—led by CEO Jamie Dimon—at an attractive price. Shares then traded around $126.
"The competitive environment has shifted, and we don't want to be complacent. We want to lean in and make investments," Jeremy Barnum, the bank's chief financial officer, told Barron's at the time. "We feel great about the operating environment, our overall market-share position, and the growth opportunities."