Over the past several years, banks have grappled with rapidly rising interest rates and an uncertain operating environment. JPMorgan Chase (JPM -0.81%) has proven to be one of the best-run banks in the U.S. during that time.
Since the start of 2022, just before the Federal Reserve's aggressive rate-hiking campaign, JPMorgan Chase stock has delivered investors annualized returns of over 16%. The SPDR S&P 500 ETF Trust has returned about half the returns of JPMorgan Chase over that same period.
JPM Total Return Level data by YCharts.
Thanks to its prudent balance-sheet management, JPMorgan Chase has done a stellar job navigating the elevated inflation and rising interest-rate cycle. That said, the stock trades at a rich valuation.
CEO Jamie Dimon said earlier this year, "We're not going to buy back a lot of stock at these prices." Should investors be concerned about JPMorgan's valuation? Let's dive in and find out.
JPMorgan Chase has excellently navigated the interest-rate cycle
JPMorgan Chase has crushed it in the past few years, putting up stellar earnings results and blowing away its banking peers in key performance measures. The secret to JPMorgan's success is its patience and capital management throughout the interest-rate cycle.
For example, in 2020 and 2021, the Federal Reserve slashed interest rates, and its benchmark interest rate -- the federal funds rate -- was near zero. As a result, interest rates on treasuries and mortgages plummeted, and many banks, which were flush with deposits, loaded up on these lower-interest-earning assets. Not JPMorgan. Instead, the bank took a more patient approach.
In 2021, Dimon warned investors that there was a fat tail of inflation and the risk was that inflation and interest rates could "go higher than people think." The bank held on to a significant amount of capital in the form of cash and liquid securities.
As interest rates rose throughout 2022 and 2023, JPMorgan put this capital to work in higher-interest-earning assets, significantly boosting its net interest income (NII). Last year, the bank had $89.3 billion in NII, up 71% from 2021.
JPMorgan's prudent capital management has led to excellent operating results over the past several quarters. Its strong balance sheet was also why it could put in the winning bid for First Republic's deposits and assets when the bank went under in May 2023.
Is CEO Jamie Dimon sending a warning to the market?
JPMorgan's stellar performance has had investors piling into the stock. However, the stock is priced at a significant premium to peers and its historical averages.
Today, JPMorgan Chase is priced at 2.41x its tangible book value. While the bank is undoubtedly worth a premium price tag, compared to peers, it has opened up quite a wide gap. For example, Wells Fargo and Bank of America are valued at a respective 1.63x and 1.58x their tangible book value.
The stock is also richly valued, compared to its history. Going back to 2010, JPMorgan Chase has traded at an average of 1.76x its tangible book value. This rich valuation even prompted a comment from Dimon during the bank's annual investor meeting in May: "Buying back stock of a financial company greatly in excess of two times tangible book is a mistake. We aren't going to do it."
JPM Price to Tangible Book Value data by YCharts.
This warning about stocks' valuations mirrors those of Berkshire Hathaway CEO Warren Buffett. Berkshire Hathaway didn't repurchase any of its own shares in the third quarter.
The conglomerate regularly buys back its stock, but only if the price is right. Buffett said they would again repurchase shares when he "believes that the repurchase price is below Berkshire's intrinsic value, conservatively determined."
What's next for JPMorgan Chase?
JPMorgan Chase had another solid performance in the third quarter, posting an excellent return on tangible common equity of 19%, while NII grew $23.5 billion. The bank also sees net charge-offs leveling around 3.4% for the year as consumers continue to show resilience.
That said, the bank expects its NII (excluding markets) to be less than $87 billion next year, down from its expected 2024 NII of $92.5 billion. JPMorgan will also invest heavily in technology and artificial intelligence (AI), which President and Chief Operating Officer Daniel Pinto said will lead to higher-than-expected expenses next year.
JPMorgan Chase is an excellently run bank that's well-positioned for success, thanks to its diversified banking business and prudent capital management. Current shareholders should feel comfortable holding on to the bank for the long haul.
With that said, the stock is priced at a hefty premium, compared to competitors and its longer-term averages. Investors may want to wait for a cheaper valuation before scooping up shares of the bank stock.
