Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

JPMorgan Chase & Co.'s market value has surged by about 60 percent in the past 12 months to $326 billion, making it the largest U.S. lender by that measure. But when executives, shareholders and analysts gather for the bank's investor day next week, they may have other yardsticks on their minds. 

Higher and Higher
JPMorgan shares have soared since its 2016 investor day, closing at a record on Thursday
Source: Bloomberg

The New York-based bank has yet to meet one long-term key profitability objective -- achieving a return on average tangible common equity of 15 percent. That's a level it hasn't attained since 2012. 

Coming Up Short
On their own, rising interest rates aren't expected to propel JPMorgan's ROTCE to its goal of 15 percent. A boost in loan growth and capital markets activity is also required.
Source: Company reports, Bernstein estimates

Analysts at Jefferies Group LLC estimate that the bank could cross that threshold by 2019. One way the bank could potentially get there quicker would be to trim its capital reserves more aggressively. That would require approval from bank regulators (plans are due this April), but it's feasible that the agencies -- under President Donald Trump's influence -- could allow such lenders to return more capital to their shareholders, either through increased dividends or stock buybacks.

Across Wall Street, the conservative estimate for the total that JPMorgan may seek to pay out ranges anywhere from $17.5 billion to $18.7 billion. But there's scope for the bank to ask for approval to return more than $22.5 billion -- or 100 percent of its profit -- without dragging its core Tier 1 equity ratio below its minimum target of 11 percent. And even if the move was denied by regulators, management can at least say it tried. 

Another area of focus for the Jamie Dimon-led firm is its consumer and community banking arm. Its profitability -- as measured by return on equity -- missed the 2016 target laid out at last year's investor day by the biggest margin.

Report Card
In two of four of JPMorgan's divisions, return on equity narrowly fell short of the firm's 2016 investor day targets
Source: Company reports, Bernstein

Investors should look for signs that JPMorgan's efforts to lure premium credit-card holders -- which cost the bank as much as $300 million in the fourth-quarter -- are beginning to pay off. As well, they should be heartened if it confirms that charge-off rates (which reflect the balances that lenders write off) remain low across various segments including credit cards, mortgages and auto loans.  

With its shares trading close to a record high and at a price-to-earnings valuation above its 10-year historical average, JPMorgan has to prove its worth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net