JPMorgan raises 2022 interest income outlook, shares rally 7%

© Reuters. FILE PHOTO: A view of the exterior of the JP Morgan Chase & Co. corporate headquarters in New York City May 20, 2015. REUTERS/Mike Segar

By Niket Nishant and David Henry

(Reuters) - JPMorgan Chase & Co (NYSE:JPM) lifted its forecast for interest income and affirmed its profitability target at its investor conference on Monday, where executives are expected to face questions on the bank's expenses and management of its capital.

The country's largest lender said it now expects net interest income (NII), excluding markets, of $56 billion in 2022. It had earlier forecast that figure would reach a "couple billion" more than $53 billion in 2022, up from its $50 billion outlook in January.

The news caused the bank's shares to jump more than 7% and helped lift stocks of other major U.S. banks.

"This is a good start," analyst Susan Roth Katzke of Credit Suisse wrote in a note.

Investors are keeping an eye on the prospects for banks to increase their net interest income, or the difference between income from loans and interest paid on deposits and other funds, as they benefit from higher interest rates.

However, as the U.S. Federal Reserve rushes to contain decades-high inflation, investors are also worried that overly aggressive monetary policy tightening will tip the economy over into a recession. These fears have driven the S&P 500 banks index down 21.5% so far this year.

JPMorgan said its NII forecast was based on an assumption that the Fed raises short-term rates up to 3% by year-end. It also assumed high single-digit loans growth and a "modest" step up in securities investments.

JPMorgan scheduled the investor conference following a one-day drop in its stock in January when it said it would allow expenses to increase 8%, or $6 billion, this year as it funded business investments that it did not persuasively justify to investors.

Chief Executive Jamie Dimon on Monday looked to reassure investors over those increased investments, in particular the bank's technology expenditure.

"We have always earned good returns while making investments," Dimon said.

Charge-offs for bad loans are estimated to rise to pre-pandemic levels "over time" but not until after 2022, thanks to strong consumer and business balance sheets, the bank said.

Provisions to build loss reserves will increase with loan growth, JPMorgan added.

The company said its target for a 17% return on tangible capital equity, a key metric which measures how well a bank uses shareholder money to produce profit, may be achieved in 2022.

Christopher Grisanti, chief equity strategist at MAI Capital Management, said JPMorgan's news showed investors have been too pessimistic on banking stocks.

"Banking businesses are generally pretty good, credit concerns are low, at least for the moment, and the net interest margin remains pretty healthy because short rates haven't come up all that much yet. So it's another example of the fact that the market doom and gloom is overstated," he said.

For 2023, the bank expects its investment spending growth rate "will moderate", but for 2022, expense forecast was kept unchanged at $77 billion. Of the $6.7 billion tech spend expected in 2022, the biggest chunk of $3.1 billion will go towards the investment bank segment, JPMorgan said.

Marianne Lake, co-chief of consumer and community banking, said her business had invested an incremental $3.3 billion from 2019 to 2022 to grow the franchise. Such investments are like "a coiled spring of future earnings power and operating leverage," Lake said.

JPMorgan also said it expects its regulatory capital requirements to increase over the next two years, but said it would have excess capital in the range of $13 billion to $22 billion in the first quarter of 2024, that would be available for business investments or distributions to shareholders.