The Case for JPMorgan Chase

Hello and welcome! Today, you are in for a little treat, and I am happy to share this analyst report with you. This report was generated in collaboration with MC&M Investments. If you are interested in an individualized financial report on a specific stock you like, please reach out to mcinturfmentis@gmail.com.

Now, let’s dig into it!

Overview

JPMorgan Chase & Co. is an American multinational bank and holding company. The firm is headquartered in New York City and incorporated in Delaware. Its current CEO is Jamie Dimon who has held the position since 2005. According to the firm’s latest 10-K filing[1], JPM is the leading financial service provider in the US with global influence. It is the largest bank in the world by market capitalization[2] and its main function is operating in business and personal banking. The firm has four different operating segments. It provides Customer and Community Banking (CBB), Corporate & Investment Banking (CIB), Commercial banking (CB), as well as Asset and Wealth Management (AWM)[3].

CCB includes:

· Consumer Banking

· Business Banking

· Wealth Management

· Mortgages and Card Services

CIB includes:

· Investment Banking

· Treasury and Lending Services

· Fixed Income and Equity Sales

· Market Security Services

CB includes:

· Middle Market Banking

· Corporate Client Banking

· Commercial Real Estate Banking

AWM includes:

· Investment Management Services

· Private Banking

Swot Analysis

Strengths

JPM is one of the most recognizable brands in banking in the US and around the globe. With branches in over 100 countries and more than 240,000 employees[4], it has a wide reach. Because of this, it draws in commercial and retail customers with substantial capital, which keeps the bank's deposits high and the balance sheet strong. High-net-worth individuals are the backbone of JPM and key to its success.

Based on this information, we can conclude the strengths of JPM as:

· Global Presence

· Wide Reach

· Strong Balance Sheet

· Customer Demographic

Weaknesses

While having branches around the world, the bank is primarily operating in the US, which means that it is, for the most part, reliant on the US market. For a company that big it is not great to be dependent on a single region’s business.

JPM, as stated earlier, is the biggest bank in the US which limits its growth potential. Even acquisitions of other banks, such as First Republic, will only make up a fraction of its revenue. Therefore, relatively slow growth is likely to continue.

One of the strengths that can easily turn into weaknesses is its vulnerability to scandals. Since JPM is banking with many people, it can be associated with institutions and individuals that can damage its image and brand. Like the involvement with Jeffrey Epstein for whom the bank managed over 2.4 billion USD worth of transactions between the years 2005 and 2019, which included 1.1 million USD worth of payments to young girls or women involved in the Sex Trafficking controversy[5]. While this is a recent example, in general, scandals will always pose a threat to the public image of the bank.

We can conclude that the weaknesses of JP Morgan Chase are:

· Overreliance on the US market

· Relatively Low Growth Potential

· Controversies and Scandals

Opportunities

One of the biggest opportunities for JPM is to expand further into new regions, and regions it has already a minor presence. Capturing market share overseas will help the bank grow larger and diversify its business. This, in turn, makes the bank even more resilient in crises.

Another great opportunity for JPM is the global credit card market. The market is growing at 2.9%[6] and the bank has already experience domestically in that field.

The ongoing concentration of the banking landscape in the United States constitutes an additional opportunity for growth. Unlike other nations, the United States has a very large number of small and regional banks. This has to do with the regulatory framework up until the 1990s. It ended with the Riegle-Neal Act in 1994, which allowed banks to branch across state lines[7] and since then, the overall number of banks is drastically declining due to failures and/or mergers. That bears the potential for acquisitions of struggling banks.

From this, we can see that the opportunities for JPM are:

· Further Global Expansion

· Credit Card Markets

· Bank Failures and Acquisitions

THREATS

One of the most obvious threats to a bank like JPM is a downturn in economic activity such as a recession or a depression. That can cause a disruption in the financial markets, decreasing asset prices, and failing loans which will consequently hurt financial institutions.

Another threat can be unfavorable regulation. Just recently, Jamie Dimon complained about proposed capital requirements by lawmakers his bank faces[8]. In general, if lawmakers decide to further restrict larger banks it will mean a competitive disadvantage for JPM.

Also, technological advancements and competition can pose a threat. The banking industry is a highly saturated market and competition is fierce. Additionally, new asset classes such as cryptocurrencies and CBDCs can disrupt the market.

In banking, one of the most important things is security for customers’ accounts, deposits, and assets. Security breaches happen every day and they cause a lot of damage. Not only will an event like this hurt JPM’s customers but also its brand and reputation.

We conclude:

· Security Breaches

· Unfavorable Regulation

· Competition in the US and Overseas

· Financial Crises

Risk Factors

Political Risks

These are risks that are associated with a volatile political environment in any country in which JPM conducts business. These risks include governmental policies, geopolitical tensions, and factors that slow or interfere with US growth.

Factors that can affect this include:

· Policies By the Federal Reserve

· Policies Regarding Taxation

· Foreign Policies

· Economic Sanctions

These can lead to unrest wherever JPM conducts its business leading to strained business relations in certain parts of the world. Public criticism can arise in different countries where the political policies may not condone the bank’s activities. If JPM, e.g., was aligned with certain governmental or industrial bodies, it could cause activist or civilian groups to boycott the bank.

Market Risks

Changes in the market can negatively affect JPM’s portfolio and ability to invest. Things such as changes in the market, declines in stock market investments, inflation, deflation, or a recession. Unanticipated events such as a decline in asset value and credit can also affect JPM in the market. Factors like these also can affect the bank's wholesale sector of banking. For example, if certain market factors like the ones listed above take place, then JPM would have a more difficult time servicing clients with regards to business banking, which is likely to impact people’s and companies’ willingness to partake in transactions managed by JPM.

Credit

JPM routinely facilitates transactions with corporations, financial institutions, asset managers, hedge funds, securities exchanges, and government entities. These companies or entities could have bad credit and/or default on their loans. To mitigate this, JPM focuses on making sure that their clients provide adequate collateral. JPM may also be impacted if the market takes so large of a downturn to the point that it cannot sell off its assets to break even on them. This in the end, if it gets large enough, will hurt JPM’s credit which will result in the whole industry suffering from it. At the end of the day just like any other bank, JPM relies on cash flow to make its due payments to securities and if it can’t do that, it will lose investors. JPM does everything that it can to do to keep its credit up. The biggest risk regarding credit is who JPM chooses to do business with.

These are the major risks associated with JPM from our perspective. An extensive list with further details is published on the firm's 10K filing[9].

Other Risk Factors

· Liquidity Risks

· Capital Risks

· Strategic Risks

· Operational Risks

· Conduct Risks

· Reputation Risks

Competitors

The United States has over 4,000 commercial banks and over 500 savings institutions[10]. That’s more than any other country in the world. Technically, JPM competes with all these institutions. However, most of these banks are nowhere close in revenue, branches, employees, etc.

Looking at JPM’s product range, assets under management, underwriting activities, and nationwide reach, it only makes sense to compare it with the other big three commercial banks (together: The Big Four) in the United States. So, let us look at a couple of key metrics for the following competitors: Bank of America Corp (BAC), Citigroup Inc (C), Wells Fargo and Co (WFC).

Ratios were calculated with trailing twelve months data (TTM). Closing price 09/15/2023.

It becomes apparent that JPM is the most profitable of its competitors. With a net margin of 35.38 % the bank beats its competitors easily, and obviously attracts the attention of value investors. This profitability, however, comes at a price. With a closing price of 148.81 USD, JPM trades at a premium compared to the competitors in the industry. JPM has the highest price over book value, and sales, respectively and the second highest price over earnings. This also affects the dividend yield which, with 2.69 %, marks the lowest percentage among the Big Four.

JPM’s standalone metrics such as the P/E ratio of 9.57 and the P/B ratio of 1.52 do not indicate an excessive overvaluation. It rather seems fair value at this level. Nevertheless, investors should be aware that there are more reasonably priced stocks in the industry.

Despite the current premium investors must pay for JPM common stock it is rather questionable that the other banks are the more valuable or conservative investment. It appears as if JPM, with its proven stability and superior profitability, portrays the safest investment in the industry. And for this safety, investors are simply willing to pay a higher price than for any of the comparable stocks.

JPM has been the only one among the big four with constant revenue growth and a positive stock price performance over the last five years.

This year, bank failures and deposit flights have made headlines in the United States. The rapid rise in interest rates took its toll and hit banks with too much exposure to US Treasury Bonds and dwindling deposits. While the failure of Silicon Valley Bank came very rapidly, there was a little bit more time to react in the case of First Republic. In a deal with the FDIC, JPM was able to acquire most of the bank’s assets with limited risk[13]. The FDIC even contributed 50 billion USD and shared losses with JPM.

This example really shows the strength of JPM in moments of crisis. Not only is the firm resilient to deposit flights, as we will discuss later, but it manages also to profit from negative developments in the financial world. JPM is interwoven into the monetary system, and it appears as if regulators and officials reach out to Jamie Dimon first when they need help.

Now. let us take a closer look at the valuation and performance to see if there is more evidence to make the case for JPM.

Valuation and Performance

In the last five years, JPM common stock has yielded a return of 34.67% or 6.13% annualized. With dividends included, a total shareholder return (TSR) of 51.55% is computed or 8.67% annualized.

In contrast, the S&P 500 (here represented by the SPDR S&P 500 ETF Trust, short: SPY) has outperformed JPM thanks to a stellar 66.72% return over the past five years or 10.76% annualized. With dividends included, a TSR of 77.53% is computed or 12.16% annualized.[14],[15]

Despite the sharp setbacks during the bearish periods of 2020 and 2022 – which resulted in a rather volatile stock performance – revenues have been constantly growing.

CAGR over the last five years was 3.36% with a sharp rise of 5.72% in 2022.

JPM’s earnings could not quite keep up with the revenue growth. The year 2021, which was wonderful for trading, lending, and underwriting securities, marked a peak at $15.36 EPS. In 2021 earnings declined by 21.29% to $12.09, the second-largest annual result in the bank’s history.

Here are a couple of key metrics for JPM (closing price 09/15/2023)[16]:

Ratios were calculated with trailing twelve months data (TTM).

Most of the valuation metrics and ratios for JPM are generally positive, while not extraordinarily great. For instance, P/E and forward P/E look quite good compared to the S&P 500. Compared to its direct competitors, however, JPM is slightly more expensive.

Next to the high margins, other ratios, such as P/S, ROA, ROE, or P/B provide further evidence that JPM is a healthy company. Of course, when compared to the current multiples of the S&P 500, JPM is in value territory. The firm's P/E of 9.57 is way smaller than the index’s 25.41[17]. This is not necessarily because JPM is overseen but rather reflects the valuation of a stock with mixed earnings in the past and relatively slow growth.

Intrinsic Value and Forecasts

Of course, a major corporation like JPM is being covered by many institutions and analysts around the world. While we, at MC&M Investments, stay away from the fallacy of forecasting any definite price targets, we would like to use the published information to get a grasp of the overall sentiment on Wall Street.

Specifically, we are looking at the intrinsic value of the analysts at Alpha Spread. To calculate an intrinsic value for a stock their analysts combine the Discounted Cash Flow and Relative Valuation Method.

The results paint a very clear picture. Under the worst predicted scenario, JPM common stock would be worth 139.99 USD which is only slightly below the current stock price. The upside instead looks almost limitless with a base case price of 204.09 USD and the best case price of a mouthwatering 554.62 USD. Of course, none of these scenarios must turn out to be true but the overall sentiment is very positive. The average analyst price target of 169.22 USD reported by Yahoo Finance[19] further confirms this positive outlook.

Further Analysis

Balance Sheet

JPM’s balance sheet received a lot of praise since the last annual Federal Reserve Stress Test. Forbes even called it a “fortress”[20]. We have looked at the key ratios provided by the Federal Reserve[21] and found them all favorable.

Here is a summarizing chart of the bank's consolidated Q2 balance sheet[22]:

Of course, there is a lot more to talk about a bank’s balance sheet but discussing every single asset/liability would go way beyond this article. JPM is a giant corporation and one can easily get lost in the weeds without making any progress in determining if the bank is an investable stock or not. That is why the mentioned stress test is so valuable. It measures whether the big banks in the United States can maintain their capital requirements if unfavorable scenarios kick in, such as skyrocketing unemployment and hefty declines in asset prices such as real estate[23].

Undoubtedly, “black swan events” can and will always happen in the economy and no stress test can guarantee total security from these. That being said, JPM is a healthy bank at this point in time.

Deposits

One detail on the balance sheet we do want to pay closer attention to, however, is the deposit section. Here, we were able to notice an interesting pattern. For quite some time we have been told that deposits in the United States are shrinking. In fact, they do. Deposits in all commercial banks across the United States have been shrinking since April 2022 and a sharp drop during the banking crisis early this year accelerated the pace[24].

While initially, JPM’s deposits declined together with the larger trend in the United States, we have noticed that the banking crisis had a positive effect on its total deposits. For clarity, we are talking about the liability side of deposits. So, whatever customers deposit at JPM and not JPM’s deposits at other institutions.

We see this as an indication that trust in JPM is high in moments of crisis. Especially since its product offering and APY for deposits are rather poor in comparison to other banks in the industry[25]. A JPM savings account yields close to zero percent interest a year. These deposits are basically free money since JPM can effortlessly boost its interest income with the additional funds.

The fact that consumers still prefer their money to be deposited at JPM shows that it is not only more trusted than other (smaller) banks in the industry but the FDIC as well. It makes JPM a cash printing machine and will continuously guarantee profitability.

Revenue Streams

A deeper look into the firm’s financials reveals what was going on in these quite eventful last couple of years. Interest income declined during the pandemic years which were accompanied by low interest rates and quantitative easing.

At the lowest point in 2021, JPM’s interest income shrank to 42.99% of the firm’s total revenue. Then, by the end of 2022, and after a period of substantial interest rate hikes, interest income rose to 51.86%. The highest share within the last five years. The latest data (Q1 and Q2) suggest an even higher share and the continuation of that trend.

Just the opposite was true for fees and commissions, as well as investment banking income. Both rose to their highest revenues on record in 2021. Obviously, that was fueled by loose spending and a red-hot IPO market. For context, we have added the US IPO data below.

The interesting pattern here is that the two categories move almost inversely to each other. One could say that they serve as a hedge within the firm and whenever the monetary policy changes JPM finds a way to profit from the new environment. The stock works as if it were a diversified portfolio itself. That is great for anyone seeking to invest conservatively and value oriented. At the same time, it limits the upside potential since JPM can never fully profit from beneficial opportunities and favorable outside conditions. In a low interest rate environment interest income will suffer, in a high interest rate environment investment banking income and fees will decline, respectively. The best scenario for the bank would be if interest rates remain for a while on the current elevated levels while the IPO market and investing activities slowly pick up again. The Federal Reserve’s new “higher for longer”[27] mantra might just be what JPM is looking for as long as the rest of the American economy can keep up, too.

Conclusion

JPM has underperformed the overall market in the last five years. Its stock performance as well as revenue growth has been below the S&P 500. Earnings have been high but fluctuating. EPS declined in 2022. On the surface, this description seems fitting for a stock that is trading at a P/E of around 10. However, it does not paint the whole picture and our analysis brought up some interesting arguments in favor of JPM. Most strikingly the recent deposit inflows, with the correlated high interest income and the inversely related (but generally growing) revenue streams.

A large economic moat, especially due to the bank's reputation, outweighs all the major threats to the banking industry. As long as JPM nurtures and keeps its image as a secure and reliable financial institution, effortless profits throughout its operating segments are almost guaranteed. Our analysis shows that almost any market condition is favorable for JPM’s business, and the bank seems completely resistant to adverse events.

The current scenario we are in, with elevated interest rates and resilient economic growth has been a boon for JPM’s interest income. Moderate rate cuts, which are expected to take place in 2024[28], would stimulate all other segments of the firm’s operation while maintaining a relatively high interest income. Record revenues and profits are almost certain under these conditions.

We think the current stock price does not reflect the full profit potential we can see ahead. The low stock performance in the last couple of years kept JPM undervalued in volatile times and the current stock price does not seem to account for the reliable generation of cash that is yet to come.

Certainly, JPM is not a growth stock and there are other opportunities in the market that can promise a much higher upside potential paired with equivalently high risk. However, investors should consider JPM common stock as a pillar of a value-oriented portfolio. At the current valuation, we can foresee growth, reliable profits, and safety in tough times.