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Nomura’s Steven Chubak Shares Two Cents on JPMorgan (JPM) and Citigroup (C) Following 1Q:18 Earnings

Nomura's Steven Chubak sees the better 1Q18 print from JPM, but has the more confident rating for C; here's why.


Nomura analyst Steven Chubak dives into JPMorgan Chase (NYSE:JPM) earnings from a cautiously optimistic stance. In addition, Chubak calls Citigroup (NYSE:C) a Buy, but anticipates attention from the shorts following the print. (To watch Chubak’s track record, click here)

Let’s take a closer look:

JPMorgan Does Not Sway Chubak from the Sidelines, But Outperforms Peers

JPMorgan dished out quite a “solid” first print of the year, with adjusted EPS of $2.37 leaping past the analyst’s $2.34 estimate and consensus of $2.28. However, a market to market (MtM) gain of $0.11 was entirely offset by losses in Corp/Other, where the company’s “core” EPS all the same reached $2.37. This beat rides on back of stronger credit of +0.07 and a dip in efficiency of +$0.02, a bit offset by a rise in tax rate of -$0.04 and softer revenues of -$0.02.

The first quarter saw CIB revenues of $10.5 billion rise past the analyst’s expectations calling for $10.1 billion and “record” Equities revenue vaulting 26% year-over-year to $2.0 billion- trouncing the analyst’s and the Street’s forecast of $1.8 billion. Derivatives and Prime Services proved strong for JPM in the quarter. FICC revenues reached $4.6 billion, but without the MtM gain, aligning with the analyst’s expectations for flat year-over-year growth. NII soared to $13.3 billion for the quarter, just above the analyst’s expectations. The JPM management team maintained its adjusted expense target for the full year of roughly $63 billion, without including the $1.2 billion impact of accounting change- likewise left out of the past guide of under $62 billion.

“Despite the revenue miss vs. our forecast, results came in ahead of the Street, and adjusting for noncore items in Corp / Other (incl. securities, PE losses), revenues would have been slightly ahead of our forecast on better results in Consumer and CIB. NII also came in ahead of our forecast, reflecting robust NIM expansion (+6bps QoQ), likely helped by LIBOR tailwinds (loan yields + 20bps QoQ), which was partially offset by softer loan growth (flat QoQ), with management citing intense competition,” highlights the analyst.

Overall, Chubak may be hedging his bets for now on JPM, he closes on an optimistic note: “While upside from higher NIMs / better trading was largely anticipated, and JPM shares have outperformed both peers and market proxies YTD (+6%, vs. +3% peers, +1% S&P Fins.), we expect today’s beat to drive positive EPS revisions / outperformance, with favorable read-across for trading and NII likely to boost shares of the other Universal banks as well.”

For now, the analyst reiterates a Neutral rating on JPM stock with a $118 price target, which implies a 7% upside from current levels.

TipRanks indicates this banking giant has optimism on its side in terms of the Street’s opinion. Out of 11 analysts polled in the last 3 months, 7 rate a Buy on JPM stock while 4 maintain a Hold. The 12-month average price target stands at $125.80, marking a healthy nearly 15% in return potential from where the stock is currently trading.

Nomura Spotlights Upside Potential for Citigroup Even Amid Short Interest

Citgroup may have met expectations on revenues and efficiency and hit a home run on EPS, but FICC and NII performance were misses in the banking giant’s first quarter print. Though Chubak stands by this stock, he likewise recognizes challenges in trading NII coupled with the legacy runoff book sizing up to be a bigger drag than slight gains in core accrual NII- a trend that has proved “persistent” in the past few quarters.

That said, the analyst maintains a Buy rating on C stock with an $86 price target, which implies a just under 23% upside from current levels.

For the first quarter of 2018, Citi delivered a “mixed” earnings show, even in face of a “lower bar” for expectations. The banking giant did impress with $1.68 in EPS against the Street’s $1.61 and the analyst’s forecast of $1.62. Chubak attributes this strength to a $0.03 rise in credit, with an ICG release “more than offsetting” any jump in Consumer NCOs along with a lower tax rate ($0.03). ICG revenues proved robust, hitting $9.8 billion and beating out the analyst’s $9.7 billion projection. Yet, FICC revenues slipped 7% year-over-year to $3.4 billion, underclassing the analyst’s $3.5 billion estimate and consensus of $3.7 billion. On a positive note, Equities revenues jumped 38% year-over-year to $1.1 billion, beating out the analyst’s $980 million forecast and consensus of $918 million. However, total trading revenues just rose 1% year-over-year, nowhere near JPM’s 7% ex-MtM gains.

Ultimately, Chubak believes that JPM outperformed Citi in the first quarter, even though his rating is more bullish on Citi, noting net interest income (NII) was a weak spot for the giant once more. Though EPS fared better than expectations, this will “not [be] enough to spook shorts,” writes Chubak. The analyst may stick with the bulls, but his conclusion is not overwhelmingly confident: “While Citi’s results stack up a bit worse than JPM’s, given YTD share underperformance (-900bps vs. JPM, -600bps vs. Universal peers), bulls will argue the bar may have rebased sufficiently, which, coupled with a discounted valuation, could provide some support at these levels. This said, early feedback suggests 1Q results provide enough fodder for shorts, given another disappointing NII print, persistent headwinds in NA Consumer (incl. weaker revenue momentum ex Hilton Gain, higher NCOs), weaker-than-anticipated results in FICC, and slightly elevated expenses. While results were generally in line with our expectation (which we note included a gain from Hilton), we could see shares U/P as shorts may look to press.”

TipRanks reveals mostly bullish attention circling Citigroup shares. Based on 10 analysts polled in the last 3 months, a majority of 7 bet bullish on the banking giant with only 3 on the sidelines, hedging their bets. With an encouraging return potential of nearly 20%, the stock’s consensus target price stands at $84.22.