JPMorgan Chase | Fundamental Analysis | MUST READ | SHORT 🔔

JPMorgan Chase, the largest U.S. bank by assets, upset the market last week when it reported second-quarter earnings that fell short of analysts' expectations. The bank also suspended share repurchases to raise capital to prepare for higher capital requirements in 2023 and 2024. After these two setbacks, is it still safe to buy the bank's stock?

JPMorgan's main second-quarter numbers are certainly not what investors wanted to see, but still, most of them were expected.

The Federal Reserve's annual stress test and consistent warnings from JPMorgan management told anyone who paid attention that capital requirements would increase, leaving the bank with less excess capital to distribute to shareholders. The bank still has a tremendous amount of capital but has essentially become a victim of its own success as the bank's growing size and other factors have led to higher regulatory capital requirements.

Incredibly strong corporate and investment bank JPMorgan Chase also posted its least profitable quarter in the past five quarters, posting a profit of about $3.7 billion. Investment banking fell sharply as events such as initial public offerings (IPOs) did not take place this year amid market volatility and uncertainty. Investment banking revenues fell by nearly $2.1 billion from the same quarter last year. Nevertheless, JPMorgan maintained its No. 1 position in the investment banking sector in terms of wallet share.

Although the bank fell short of forecasts, there were a few positives to note in the quarter. Lending continued to grow, and net interest income ( NII) - the profits that banks make from loans, securities, and cash - also grew.

Total average loan balances were up 2% from the previous quarter and up 7% year-over-year. Credit card balances jumped 9% in the quarter and rose 17% year over year. Commercial loans at the end of the period were also up 4% quarter-over-quarter and 10% year-over-year, with particular growth in the mid-market banking sector.

Banks are also in the most aggressive increase in interest rates not seen since the Great Recession. NII was $15.2 billion in the quarter, up $1.3 billion from the first quarter. In addition, management raised its NII forecast and now expects NII, excluding market-related NII, to be $58 billion for the year, up from the previous forecast of $56 billion.

Credit quality so far remains very high, and management also maintains its forecast for spending at $77 billion for the year.

Although the forecasts fell short, JPMorgan still posted a 17% return on tangible total equity (ROTCE), which is the bank's return on equity after deducting intangible assets and goodwill.

This figure is in line with the bank's immediate financial goals. In addition, NII continues to improve. We are hopeful that investment banking activity will begin to recover later this year. While capital returns will be more modest in the near term, JPMorgan still has a tremendous amount of capital and is indeed constrained by regulators, which is beyond its control.

The bank's stock currently trades at 163% of its book value or net worth, and less than eight times earnings, a historically low valuation in recent years. For this reason, we rate the stock a "buy" because, despite the lower valuation, the bank's business has only gotten stronger in recent years.

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