Deutsche Bank Analyst: JPMorgan Trends Beat Wells Fargo

December 21, 2014

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JPMorgan Chase & Co. (NYSE: JPM), the nation's largest bank, has underperformed its peer Wells Fargo & Co (NYSE: WFC) year-to-date, but an analyst said the trend may shift.

Deutsche Bank's Matthew O'Connor sees upcoming catalysts for JPMorgan shares that include an improved dividend yield, better-than-expected return on capital and big benefits from cost cuts.

Analysts on average have cut their earnings estimates on JPMorgan 7 percent year-to-date, while its shares are up 5.8 percent.

Estimates for Wells Fargo, in contrast, have held steady through 2014 and its shares are up 20 percent.

But O'Connor, who maintains a Buy rating and $66 target on JPMorgan, said core revenue and expense trends are better there compared with Wells Fargo.

"It's surprising the stock hasn't performed better," O'Connor said of Morgan.

"Core" revenue, excluding gains from equity and debt, will come in flat at JPMorgan in 2014, versus a decline of 4 percent at Wells Fargo, according to O'Connor. Meanwhile, 2014 core expense will fall 2 percent at Morgan versus 1 percent decline at Wells Fargo.

Earnings growth over the next few years will average 11 percent at JPMorgan according to O'Connor, versus just 6 percent at Wells Fargo.

Well Fargo trades at about a 20 percent premium to its slightly bigger brother, based on forward consensus estimates. Although some of Fargo's premium stems from better earnings stability, O'Connor said its magnitude "seems high."

Among potential upcoming catalysts for JPMorgan shares, the bank's dividend yield is likely to rise to 3 percent, from a current 2.7 percent following completion of the next round of stress testing by the Federal Reserve in March, O'Connor said.

The company recently cut its return on equity target to 14 percent from about 15.5 percent, but O'Connor, who met recently with JP Morgan's Chief Operating Officer Matthew E. Zames, said the target doesn't include gains from cost-cutting nor the reallocation of capital to reduce its risk profile.

JPMorgan has been "dribbling out" cost-cutting plans during the past year, and O'Connor said the bank could save up to $4.5 billion by 2016.

About $2 billion could come out of investment banking with $2.5 billion from consumer banking in the form of headcount cuts and branch downsizing.

Higher interest rates, if and when they materialize, could help too, O'Connor said, with "nearly all the upside falling to the bottom line."