Companies part of the banking sector in the U.S. are feeling the heat following the recent collapses of Silicon Valley Bank, Silvergate, Credit Suisse (NYSE: CS), and Signature Bank.

For instance, shares of JPMorgan (NYSE: JPM) are down 25% from all-time highs and have declined by 9.6% in the last month as investors are worried about a tepid lending environment amid rising interest rates. 

While Silicon Valley Bank failed to account for interest rate risk, several bank stocks are experiencing a sell-off as Wall Street is now wary of the state of the broader banking system.

But is the drawdown in the stock prices of blue-chip companies such as JPMorgan exaggerated?

 

Is JPMorgan stock a buy right now?

Valued at a market cap of $377 billion, JPMorgan is among the largest banks in the world. JPMorgan stock has returned 238.6% to investors in the last decade, after adjusting for dividends, outpacing the S&ampP 500 index, which is up 200% since March 2013.

Rising interest rates allowed the banking giant to offset lower demand for loans across verticals, increasing adjusted earnings by 7% to $3.57 per share in Q4 of 2022. Moreover, data from Yahoo Finance suggests analysts tracking JPM stock expect earnings to increase by another 7% this year, which suggests the stock is priced at an attractive forward price to earnings multiple of 9.9x.

JPMorgan also pays investors annual dividends of $4 per share, indicating a forward yield of 3.1%. Since April 2009, JPMorgan has increased dividend payouts at an annual rate of 23.9%, which is remarkable for a large-cap stock.

But investors should understand that bank stocks are cyclical, and JPMorgan slashed its annual dividends from $1.52 per share to $0.05 per share during the financial crisis back in early 2009.

Will the financial behemoth be compelled to reduce dividends again in 2023 if recession fears come true?

 

JPMorgan and bond investments

A primary reason for the collapse of SVB was the massive unrealized losses in its bond portfolio. Multiple interest rate hikes in 2022 meant customers were moving deposits out of SVB (NASDAQ: SIVB) and investing capital into high-yield bonds, resulting in liquidity issues. So, SVB had no option but to sell its bond portfolios at a loss. 

However, JPMorgan ended 2022 with $214.5 billion of tangible common equity and the unrealized losses in its bond portfolio stood at $36.7 billion. So, even if JPMorgan has to sell its entire bond portfolio at a loss, it can easily survive due to its robust financials. 

It seems JPMorgan’s management team had the foresight to look much beyond an environment of low-interest rates that prevailed during the onset of the COVID-19 pandemic. The company’s CEO, Jamie Dimon, is a seasoned veteran and realized the Federals Reserve’s quantitative easing measures in 2020 would eventually lead to inflation and a period of rising interest rates. 

Back in late 2020, Dimon had emphasized he would not touch U.S. Treasuries with a 10-foot pole as inflation could accelerate, resulting in quantitative tightening measures. 

 

The final takeaway

JPMorgan is a well-capitalized bank with rising profit margins and a robust balance sheet. It has survived multiple recessions and is armed with the required liquidity to withstand another market downturn in 2023.

Analysts remain bullish on JPMorgan stock and expect it to gain over 20% in the next 12 months.

JP Morgan Chase (NYSE:JPM)
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