Buy Alert: How BlackRock Partnership Positions JPM Stock in Cryptocurrency Surge

Bitcoin is the digital world's non-sovereign reserve currency and serves as a unique way to diversify portfolios, consequently enhancing total risk-adjusted returns. However, despite numerous possibilities for capitalizing on this preeminent virtual asset, there remained one notable deficiency: the creation of a spot bitcoin ETF.

The pursuit of a spot bitcoin ETF has been a considerable endeavor. The SEC (Securities and Exchange Commission) has denied all 33 previous applications spanning across multiple filers ever since the Winklevoss twins first initiated their bid over a decade ago.

However, due to recent developments like BlackRock Inc (BLK) – managing an incredible $8.5 trillion in assets under management (AUM) – joining the fray in June, Grayscale's court triumph against the SEC rescinding its past application disapproval, followed by the fresh approvals of a leveraged Bitcoin futures ETF and Ethereum futures ETFs, we have come closer than ever.

Further adding to this progress, according to recently disclosed data, BLK has submitted an application for a spot Bitcoin ETF despite unwavering prior rejections from the SEC.

The SEC has previously spurned applications on the basis that Bitcoin's decentralization and volatility could hinder fund managers from safeguarding investors against market manipulation. Currently, all U.S.-traded bitcoin ETFs are tied to futures contracts traded on the Chicago Mercantile Exchange.

In its application, BLK announced JPMorgan Securities as one of the "Authorized Participants" for its proposed Bitcoin ETF.

U.S. banks like JPMorgan Chase & Co. (JPM), governed by strict regulations, currently cannot hold Bitcoin directly. However, the proposed structural change to spot bitcoin ETFs could alter this scenario. The modification would enable APs to create new shares within the fund using cash instead of strictly relying on cryptocurrency. This paves the way for these regulated banking entities that are unable to hold crypto assets directly.

Authorized participants generally oversee the creation and redemption of ETF shares in the primary market, ensuring the ETF’s price aligns with the value of the underlying securities, in this case, Bitcoin.

Securing authorized-participant agreements is typically straightforward for ETF issuers, yet concerns were raised that bitcoin funds could face challenges due to cryptocurrencies being a relatively new asset class.

If approved, JPM could potentially serve this role for the first such ETF in the U.S., a move anticipated to attract billions in institutional capital and stimulate the cryptocurrency market.

Critics have been quick to note the contradiction in JPM's involvement, given CEO Jamie Dimon's repeated criticism of Bitcoin, advocating for a government ban on cryptocurrencies due to concerns over their legitimacy.

However, Bloomberg Intelligence analysts suggest the SEC could approve spot Bitcoin ETF proposals committing to cash-only creations and redemptions, provided there are agreements with authorized participants. They estimate a 90% probability of SEC approval, with several firms expected to launch a spot Bitcoin ETF as early as January.

A spot bitcoin ETF is an investment tool that enables investors to gain exposure to the price fluctuations of bitcoin in their typical brokerage accounts. Unlike derivative contracts, this ETF directly invests in bitcoin as the underlying asset.

APs are economically motivated to leverage arbitrage opportunities in the market, a process involving the trading of ETF shares or underlying securities when minor price discrepancies arise between the two.

In scenarios where ETF shares trade at a premium or discount relative to bitcoin's actual price, APs step up to either create or redeem ETF shares in larger volumes. This action essentially arbitrages any difference, aligning the ETF share price with Bitcoin's cost.

Spot bitcoin ETFs present a spectrum of possibilities for both retail and institutional investors looking to speculate on bitcoin. They circumvent the technical complications of managing a cryptocurrency wallet and alleviate security concerns related to the safeguarding of private keys.

The appointment of JPM as an AP could positively influence the bank's share value, as it demonstrates the bank's readiness to engage in the burgeoning cryptocurrency sector and opens possibilities for a new stream of revenue via arbitrage and liquidity provision.

Nevertheless, the financial performance of JPM is not solely determined by this engagement. It is also contingent on external factors like the SEC’s verdict on approving the spot bitcoin ETF, the market's demand and mood toward bitcoin and other cryptocurrencies, and the overall regulatory and competitive landscape of the banking industry. These elements could concurrently sway the stock performance of JPM.

Bottom Line

The potential for a U.S. spot bitcoin ETF cannot be understated, given the vast expanse of the American capital market. According to figures from the SIFMA, American-held assets represent an impressive 40% of total global fixed-income assets and equity market cap. Moreover, ETFs in the U.S. are more prevalent as part of the total asset picture than they are in other regions. They make up 12.7% of the equity assets in America, compared to 8.5% in Europe and 4.4% in the Asia-Pacific.

This equates to a U.S. ETF market valued at around $7 trillion, significantly larger than Europe’s $1.5 trillion or Asia-Pacific’s $1 trillion markets. Judging from another angle, considering that the assets handled by broker-dealers, banks, and registered investment advisors (RIAs) in the U.S. reach into the trillions, a minute fraction of these managed and brokerage assets transitioning into a spot bitcoin ETF could significantly affect the financial landscape.

It's also worth highlighting that the U.S., according to Chainalysis's Global Crypto Adoption Index, ranks fourth in crypto adoption. This high level of acceptance might translate well into investment. Banking institution JPM's openness to engaging with this burgeoning market might lead to advantageous outcomes.

However, prospective investors should consider various additional factors. For instance, JPM's recent earnings were boosted by Republic's purchase, an influence expected to wane in upcoming quarters.

Notably, card delinquencies rose in November, potentially impacting both the card business and JPM's overall financial standing adversely. Commercial R/E, Sovereign Debt, and recession reports add complexity when attempting to reconcile them with JPM's high stock value.

The bank has recorded two instances of flat dividend growth over the 12 quarters, while inflation rates were significantly high. JPM has not been a reliable dividend growth investment over the past five years, with growth approximating only about 10%.

Investors in search of steady returns may want to tread carefully. JPM's forward dividend yield currently stands at 2.44%, lower than its four-year average yield of 2.91% and below the 3.32% sector median.

Moreover, the relatively low Price/Earnings ratio of 10.34x suggests market apprehension.

Given this scenario, investors should wait for a better entry point in the stock.

Earnings Season Preview: What Lies Ahead for Banking Stocks?

Financial institutions offer various consumer financial services, encompassing current and savings accounts, online payment options, credit and debit card facilities, residential and commercial lending options, insurance coverages, and investment portfolio management. Robust consumer spending and business investment activities propel demand for these financial services.

The third-quarter earnings season will kick off with big banks this week. As banking and finance sector giants JPMorgan Chase & Co. (JPM), BlackRock, Inc. (BLK), WaFd, Inc (WAFD), and Unity Bancorp, Inc. (UNTY) prepare to release their results, we look at what analysts expect and what could shape their prospects.

Before delving into the financial prospects of these stocks, let’s discuss the factors influencing the industry’s trajectory.

The financial sector, particularly the banking segment, has demonstrated signs of stabilization following the turmoil induced by the collapse of the regional banks. The recovery coincides with the Federal Reserve's benchmark interest rate hikes to its peak in over two decades, aiming at alleviating inflationary pressures.

In September, record-breaking 334,000 nonfarm payroll additions surpassed economists' forecasts and brought increased potential for further rate increases. This comes as an overheated job market must be balanced by cooling inflation to achieve a desirable economic "soft landing." Higher interest rates could prove advantageous to banks, typically resulting in higher net interest income.

However, the market sentiments surrounding banking stocks have been negatively impacted by the downgrades and warnings issued by top rating agencies — Moody's and Fitch. These actions have gravely spotlighted investors' anxieties concerning the industry's stability and future. Similarly, S&P Global reduced its credit ratings and outlook for several U.S. regional banks, marked by their considerable commercial real estate (CRE) exposure.

This action could lead to increased borrowing costs for the banking sector, battling to recover from previous upheavals. Furthermore, with the Fed’s interest rate hikes raising borrowing costs, banks find themselves in a situation where they must offer higher interest on deposits to retain customers considering more lucrative alternatives.

In the forthcoming weeks, the financial sector, representing more than 40% of the S&P 500 members, is set to dominate market discourse, as it is slated to reveal third-quarter earnings. According to a Factset article, the sector is predicted to record the fourth-highest quarterly earnings growth rate at 8.7% among 11 sectors.

The banking industry is anticipated to report the third-highest annual earnings growth rate at 4%. Diversified Banks are expected to achieve an earnings growth of 7% on a sub-industry level, whereas Regional Banks may report a 15% decline in earnings. Within the Capital Markets industry, Asset Management and Custody Banks are projected to record earnings growth.

Let’s now comprehend some factors that could influence the featured stocks in the near term:

JPMorgan Chase & Co. (JPM)

JPM has proven its robustness and keen strategic foresight in the past few years, preparing tactically for a high-interest rate environment by stockpiling cash starting in 2021. Their fiscal prudency awarded them an advantageous position to acquire First Republic Bank under desirable terms following its seizure by federal regulators earlier this year.

The second quarter saw a surge in JPM's revenue and net income, boosted by higher interest rates and the well-timed acquisition of First Republic Bank. These successful endeavors are testaments to the bank's competent management and foresight.

Looking forward to the imminent week, JPM is expected to exceed expectations with its third-quarter earnings – a result of excellent performance across its primary business sectors.

According to data compiled by Bloomberg, the banking giant stands ready to record the fastest earnings-per-share growth compared to other major U.S. investment banks this reporting season.

The slump in trading revenues and investment banking fees was offset by the bank's net interest income increase of 27% during the quarter. According to Piper Sandler, despite persistently high interest rates, the bank might surpass its annual net interest income guidance.

For the fiscal third quarter ending September 2023, JPM’s revenue and EPS are expected to increase 20.2% and 24.8% year-over-year to $39.31 billion and $3.89, respectively.

Beyond these impressive forecasts, it is noteworthy that JPM surpassed consensus revenue and EPS estimates in each of the trailing four quarters.

BlackRock, Inc. (BLK)

BLK is recognized globally as a top-tier provider of investment, advisory, and risk management solutions, risks facing adversity due to escalating interest rates. An upward trajectory in interest rates stands to diminish the demand for bonds and fixed-income securities, which serve as substantial income generators for BLK.

As interest rates climb, bond prices take a downturn, prompting investors to explore other asset classes or seek out richer yields in alternative locations. This scenario can potentially depress the value of BLK’s assets under management (AUM) and any fees garnered from managing these assets.

Further concerning is that BLK leans heavily on debt to fuel its operations and fund acquisitions. As of June 30, 2023, the firm registered $7.96 billion in total long-term borrowings. For the six months that ended June 30, 2023, BLK paid approximately $89 million in interest on long-term notes.

The firm's EPS is projected to take an 11.5% year-over-year plunge to $8.45 for the fiscal third quarter ending September 2023 as it grapples with decelerating institutional flows and the impacts of foreign-currency headwinds.

On a brighter note, the company’s revenue for the same quarter is forecasted to increase 5.6% year-over-year to $4.55 billion. The company topped consensus EPS estimates in the trailing four quarters and consensus revenue estimates in three of the trailing four quarters.

WaFd, Inc (WAFD)

Regional bank WAFD offers various financial products and services, encompassing current and savings accounts, mortgages, loans, and investments.

A potential rise in interest rates could boost the bank’s net interest income, as evidenced by its third-quarter net interest income results that reached $168.70 million, marking an 11.2% year-on-year increase.

Over the past three years, the bank has achieved impressive growth, with EPS escalating by 18.3% CAGR. If WAFD maintains this trajectory, shareholders should be thoroughly satisfied.

Furthermore, over the past three years, the company's revenue and net interest income expanded at CAGRs of 9% and 13.8%, respectively, highlighting the solid caliber of WAFD’s growth.

One point of concern lies in the bank's substantial reliance on debt. For the last reported quarter that ended June 30, 2023, WAFD reported borrowings of $3.60 billion at an interest rate of 3.76%.

Moreover, for the fiscal fourth quarter ending September 2023, WAFD’s revenue is anticipated to decline 4.3% year-on-year to $180 million, while EPS is expected to decline 16.2% year-over-year to $0.90.

Unity Bancorp, Inc. (UNTY)

UNTY, a community-oriented bank in Clinton, New Jersey, is well-positioned to capitalize on its robust fundamentals, solid loan and deposit balances, and diverse fee-income sources.

It is a conservatively managed organization that has constantly been acknowledged as a top-tier community bank. Although not exempt from the challenges faced by the broader banking sector, UNTY seems well-prepared to confront these difficulties while retaining the confidence and favor of the communities it serves.

The bank's revenue and net interest income expanded at CAGRs of 14.8% and 17%, respectively, over the past three years, justifying its strong growth trajectory.

UNTY's main earnings source, net interest income, decreased marginally sequentially by $0.4 million to $23.5 million. The decline was due to the cost of interest-bearing liabilities rising faster than the yield of interest-earning assets, causing a slight decrease in net interest margin to 4.04%.

Mixed analyst estimates about the company’s potential are evident as UNTY’s EPS is expected to decline 4.3% year-on-year to $0.89, while its revenue is expected to increase 1.2% year-over-year to $25.15 million for the fiscal third quarter ending September 2023. Moreover, the stock has topped the consensus EPS and revenue estimates in three of the trailing four quarters.

Furthermore, UNTY experiences rapid growth and has strategically chosen to pay out a minimal fraction of its earnings as dividends to shareholders, opting instead to reinvest back into the business. This approach promises to generate significant value for investors over time. Over the past three and five years, UNTY's EPS has grown at CAGRs of 22.4% and 19.2%, while dividend payouts grew at 13.7% and 12.6% over the same periods.

3 Stocks To Benefit from the Recent Rate Hike

High inflation has been a problem for the economy this year. Although the consumer price index (CPI) eased slightly in October, it remains way above the Fed’s 2% long-term target.

The Federal Reserve has been trying to combat runaway inflation by draining liquidity from the financial system by hiking the benchmark interest rates and selling off a significant part of its bond portfolio.

The Fed has raised the benchmark interest rate six times this year, with the fourth consecutive 75 basis point rate hike taking the target range to 3.75%-4%.

Bankrate’s chief financial analyst Greg McBride said, “A fourth consecutive rate hike of 0.75 percent – after going 28 years without one that large – speaks to the urgency of the Fed’s task.” “They’re still playing catch-up against inflation that continues to run near 40-year highs,” he added.

Do you think the Fed can pull off a soft landing for the US economy now that inflation has cooled slightly in October?

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Concerns over rising borrowing costs have led to volatility in the stock market. However, not all sectors suffer from rising interest rates. Financial institutions, including banks, usually benefit from rising interest rates as it helps them expand their interest income.

Therefore, it could be wise to make the most of the strong uptrend in bank stocks JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and The Goldman Sachs Group, Inc. (GS). Continue reading "3 Stocks To Benefit from the Recent Rate Hike"