Why JPMorgan Is 'Best House' In Banking Neighborhood

• JPMorgan Chase & Co. JPM shares are down 10 percent since July 14, having plunged from above $68 to below $58 in August.
• Morgan Stanley’s Betsy L. Graseck maintained an Overweight rating on the company, while reducing the price target from $75 to $72.
• Graseck believes that the company could achieve 14 percent ROTCE in 2017, driven by richer mix loans and significant expense control.

Analyst Betsy Graseck said that the uncertainty around rates was causing financial investors to opt out of bank stocks and move to fee-generating financial sectors. “Without an easy win in revenue growth, managements need to deliver lower expenses to drive up pre-tax margin.”

Of its total expense cuts of $4.8b, JPMorgan still has 60 percent remaining, which would reflect in the bottom line over the next 9 quarters.

Graseck commented, “We have been out on a limb saying that JPM lowered its Sifi buffer from 4.5% to 4.0%, primarily through deposit shrinkage…Over time, we expect JPM will get to a 3% Sifi buffer, in-line with peers.” The analyst added that this would probably boost capital return, with the dividend remaining strong.

Morgan Stanley estimated an increase in the company’s total payout from 55 percent in 2015 to 70 percent in 2018, with the dividend yield remaining robust at 3 percent.

“Our $72 price target, down $3 from $75, reflects a JPM that can punch out 5% earning asset growth fueled by richer mix loans, housing reserve bleed offsetting commercial reserve build, and strong execution on cost saves to hit 14% ROTCE in 2017,” Graseck wrote.