JPMorgan's Win Was Already Baked In

JPMorgan Chase & Co. broadly beat Wall Street's expectations with third-quarter results that should enthuse shareholders -- and not just because they'll be cashing in a higher dividend. 

For one, cost controls remain in check: the bank is on track to hit its targeted 2017 expense figure of $58 billion. That, and an ongoing $19.4 billion buyback program is helping to bolster its profitability -- an especially important metric considering that it's a top priority for current and prospective shareholders surveyed by Barclays. 

That enhanced profitability and a sustained climb in earnings amid a backdrop of slowing loan growth should convince shareholders that JPMorgan's valuation is deserved, even as it inches closer to pre-crisis highs at 1.8 times its tangible book value. 

Profitability Pays

JPMorgan's valuation has climbed in recent months in part because the bank's profitability has stabilized. Its return on equity -- a key metric -- is set to hit its highest levels since the crisis.

From here, though, it may be a tougher climb. Importantly, many of the factors that could drive its valuation higher are outside its control, like the pace and frequency of further Federal Reserve interest-rate increases. And as I've written, hopes of corporate tax reform, which would could meaningfully boost the bank's earnings, remain just that. (For what it's worth, JPMorgan's chief financial officer Marianne Lake said Tuesday that the bank doesn't expect it to result in a "windfall gain"). 

As for a loosening of financial regulations, while we have witnessed a few tweaks including the Federal Reserve's decision to grant a one-year extension for the biggest banks to submit their so-called "living will," the bulk of any changes are yet to follow through. Despite expectations of regulatory relief, investors should remember that it's not guaranteed and get on the same page as JPMorgan's Lake and Dimon who are optimistic but not confident about prospects. 

But back to the latest quarter. CEO Jamie Dimon is still probably mystified by the market's obsession with the results of its fixed-income unit, since it's far from the sole driver of the bank's profits. Regardless, the 27 percent drop from this time last year wasn't surprising, only because onlookers were prepared for such a result after Dimon warned last month that trading revenue could fall in this neighborhood.

Managing Expectations

JPMorgan shareholders shouldn't linger on this slip because they knew it was coming. That should show Dimon the value of managing expectations, and dissuade him from following through on a threat to squash such guidance. It's better to have investors in the loop than blindsided. 


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