JPMorgan’s $11.58 million contingent yield autocalls on stocks seen as bet on digital finance

By Emma Trincal

New York, Dec. 9 – JPMorgan Chase Financial Co. LLC’s $11.58 million of contingent income autocallable securities due Dec. 7, 2023 linked to the worst performing of the common stocks of American Express Co., Discover Financial Services and Capital One Financial Corp. offer an alternative to notes tied to big banks with potential benefits for investors, a structured notes distributor said.

“The outlook on these financial stocks is pretty good. Those are credit card companies and technology-focused banks that have the potential to grow in this environment. They’re the newer wave of finance,” said Matt Rosenberg, director at Halo Investing.

The notes pay a contingent quarterly coupon at an annual rate of 11.75% if the shares of all stocks close at or above their 60% downside threshold levels on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if each stock closes at or above its initial price on any quarterly determination date other than the final one, after six months.

The payout at maturity will be par plus any coupons due unless any stock finishes below its 60% downside threshold level, in which case investors will lose 1% for each 1% decline from the initial price for the worst performer.

The reign of plastic

“As you continue to see people relying more and more on credit and digital payments, corporations like Capital One and American Express are no longer just big credit card companies...they’re also financial centers using innovation to push for a more cashless society.”

While the credit card business relies on a strong economy, the underlying stocks should be resilient in the face of the pandemic, he noted.

“Similar to the coronavirus boost that made e-commerce retail businesses thrive during the pandemic, Amazon being the obvious example, a Covid winter could end up being beneficial for those stocks as well,” he said.

Credit and recovery

Capital One is a bank that operates primarily through its online and mobile channels, with a more limited branch presence compared with traditional banking peers, said Eric Compton, senior equity analyst at Morningstar, in a research report.

However, the bank’s concentration in the credit card space with cards making up almost half of total loans and roughly over 60% of total revenue, could make the company vulnerable to a recession, he said.

Compton said an economic decline would be the greatest risk for credit card companies.

“Near-term results for Capital One will be severely impacted, due to its high card exposure and high payments exposure, which will result in higher charge-offs and lower payments volumes as the Covid-19-driven recession develops,” the analyst said.

“Capital One has higher exposure to subprime credit card lending and subprime auto lending than most peers, and as a result, we think the bank’s charge-offs will be higher than peers.”

Compton in a separate report has a positive outlook on American Express, which he sees as the “go-to payment source for businesses.”

Overall, those companies, including Discover, may encounter higher charge-offs as they remain sensitive to unemployment, fiscal stimulus and vaccines whose developments “remain largely unknown,” he noted.

Banking 2:0

Rosenberg said that the defensive structure of the notes coupled with the “fintech” advantage of the underlying companies provided a margin of safety for investors in the note.

“With a 60% barrier, even if we see the financial sector hit by a recession, you still have a pretty decent level of downside protection,” he said.

“Each one of those companies is well positioned for a pullback. They’re taking banking to the next level. These are forward-thinking companies that are changing how you bank by developing rich digital infrastructures.

“If we have a post-pandemic recovery, Amex, Capital One are poised to rally as retail sales will be up.

“If someone has a tactical outlook on this sector, the note offers a good balance between risk and a nearly 12% return.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent with Morgan Stanley Smith Barney LLC as dealer.

The notes (Cusip: 48132N174) settled on Wednesday.

The fee is 2.5%.

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