To The Moon

JP Morgan is our top pick in US banks

Consumer banking has gone up one up over Investment Banking.

Last Friday, both JP Morgan and Morgan Stanley reported 3Q22 results, but their shares price had contrasting fortunes.

JP Morgan rose 1.7% outperforming the 2.4% drop in S&P500 Index. On the other hand, Morgan Stanley slumped 5.1%, its heaviest daily decline since June 2020.

Here are my insights:

• Contrasting earnings results
• Higher interest rate has benefited JP Morgan
• JP Morgan is at a bargain valuation

Contrasting earnings results

JP Morgan reported earnings beat where else Morgan Stanley missed market expectations. Below is a summary of their results:

• JP Morgan -3Q EPS and Revenue: $3.12 and $33.5 billion, ahead of expectations of $2.88 and $32.1 billion.
• Morgan Stanley -3Q EPS and Revenue: $1.47 and $13.0 billion, below consensus estimates of $1.52 and $13.29 billion.

Higher interest rate has benefited JP Morgan

JP Morgan is largely a consumer bank. It derives net interest income from loan interest rates offset by the fees paid to depositors.Net interest income for JP Morgan rose to a record high of $17.6 billion. In a recognition of the higher interest rate environment, the bank has raised its guidance by expecting FY22 net interest income to be $66 billion.

Morgan Stanley is mainly an investment bank with a sizeable wealth management division. Net interest income rose to $2.5 billion and constitutes a fifth of its 3Q revenue. Its main revenue source is the wealth management segment which contributed about 47% to its 3Q revenue. Investment Banking and trading revenue has slowed down and only contributed 27% of its 3Q revenue.

JP Morgan is at a bargain valuation

Net interest income for JP Morgan is now at 54% of its net revenue, crossing the 50% mark this quarter for the first time since 2Q 2020. This makes JP Morgan one of the prime beneficiaries of the current rising interest rate cycle.

JP Morgan is trading at a bargain valuation. On a historical basis, the bank is trading at 1.28x P/B, more than 1 standard deviation below its 3-year mean of 1.33x. In contrast, Morgan Stanley, with a less interest income component, is trading at 1.47x P/B, above its 3-year mean of 1.40x.

JP Morgan also generates a robust 15% ROE and is well capitalized at 12.5% CET1. This is our top pick among the US banks.