S&P Capital IQ's Erik Oja talks about why he has a buy recommendation on JPMorgan stock. The bank just reported better-than-expected results. Bobbi Rebell reports.
JPMorgan a first big US lender to report results that the Fed raised its key interest rate. For the first time in nearly a decade out with better than expected results over JPMorgan as get more from S handicap like he is Eric they're great to see Aric. I thank you Bobby so good day for JPMorgan what experts in their favor. Well what's working in their favor is a very strong consumer lending very strong auto landing. And continuing high credit quality from the US consumer which means that JPMorgan Chase have to put aside. Not as much money as people had originally. Anticipated for that long so it looks like credit quality and loan growth is very strong for the consumer. The fact that interest rates are still really loads of that and now really expected the fact that very slow and measured approach. In terms of raising interest rates into the new year how does that affect their ability to make a profit. While net interest income the profit that they may come along has been flat to declining for several years now. However for 2016. JPM sees an additional two billion dollars in revenue. From a slightly wider interest rate spread in 2016. So they see some benefits. Possibly do not cost cutting at what point did you run out of it costs to cut. They've had to spend management sorry go ahead. Sorry headcount is down about 3% from a year ago a lot of that has come from the mortgage banking. And trading. Aside so they've done a lot of cost cutting is probably more to gulp. I would imagine that they'll be more cost cutting in the capital markets that equity and bond trading areas so. Probably another single. Low single digit headcount declined. I headcount is down about 43000. People since 2012. That's a large reduction. It is it is there are also focus on on oil prices in the energy sector. How. How much has that affected JPMorgan or did it affecting you Morgan and and really the whole banking sector. Yet it affects them a lot. Right now with oil at about 31 dollars a barrel. JPM says that if distaste for another eighteen months they'll have to take a significant. Reserve against it. And they estimate that to me be about 750. Million dollars which would be quite significant. Even though they wouldn't have to recapitalize the bank it would still be a large hit to profits. They cautiously expect that energy prices will recover and they know that the forward market for oil is about 41 dollars a RO sol. They are cautiously optimistic on energy landing. So what's your take on a stock. Probably about buy recommendation. On the stock and that's primarily because of the strength in their consumer lending division we see that as remaining strong. In addition the valuation of JPM right now it's about just under ten times forward which is getting a little bit law. Are considering that the US is still in growth mode and we do not see a recession this year. Looking forward update is just beyond the first bank to report I know we've Citibank. And Wells Fargo on the docket for Friday credit if the sector with the especially those two companies. Well I think with Al Wells Fargo. I'll we expect similar results wells Fargo's 100%. In the west very little international exposure. Are they should get some real benefits from a widening. Interest rate spread. For 2015. And for 2016. They have very strong long growth very strong consumer orientation. Offer Citigroup for a little bit more cautious even though we have of buy recommendation on on Citigroup and Wells Fargo. Com with Citigroup because of the international exposure. They'll do. I think it it'll be a little bit dom dicier for them in terms of consumer lending globally. And I'm particularly Asia Latin America were a little bit more cautious on that. And capital markets of course is a larger part of Citigroup and with JPMorgan Chase. I believe there thanks Eric. Thank you Bobby Eric as a B cap like you I've got to repel this is writers.