JPMorgan Chase (NYSE:JPM) stock tanks 6.5%, its biggest single-day drop since June 2020, after the bank issued guidance for higher-than-expected expenses this year, leading Wells Fargo analyst Mike Mayo to downgrade JPMorgan to Equal Weight from Overweight.
"This issue is certain to us: front-loaded spending for less certain back-ended benefits," Mayo writes in a note to clients. While Wells Fargo doesn't back off of its "Goliath is Winning" theme for JPMorgan (JPM), "the cost and time frame for doing so is greater and longer than expected," he said.
In its Q4 presentation, JPMorgan (JPM) said it expects 2022 adjusted noninterest expense of ~$77B, up by ~$6.1B from 2021.
As a result, JPM is more expensive than the average bank at a time when "other banks are more pure plays on our 2022 theme, 'NII to the Sky'," the analyst said.
Trims price target to $180 from $210.
Mayo estimates that return on tangible common equity will decline to 15% and won't reach 17% for the next three years due to higher costs, lower fee revenue in CIB and Consumer, and fewer buybacks.
Management said the spending will help it gain market share in each of its businesses, but gave little in the way of other metrics for future expectations, Mayo added.
Wells Fargo trims EPS estimates to $11.25 from $12.65 for 2022 to $12.30 from $14.35 for 2023 and to $14.00 from $16.25 for 2024.
"Good long-term company, but perhaps too long of a horizon for bank stock investors, especially without more detail," Mayo writes.
From JPMorgan's (JPM) conference call, CEO Jamie Dimon responds to Mayo's request for more details on what kind of payoffs the company will see from boosting its expenses: "It is very possible in 2023, we’ll have a 17% ROTCE. It depends on how we deploy our capital. It depends on fixed income markets. It depends on a bunch of stuff like that."
But he declined to provide specific targets for its businesses.