JP Morgan Chase (NYSE:JPM) is a company with a rich and long history that goes through the 19th century. It provided a large portion of funding that was needed for the American railroad system as well as an amalgamation of Andrew Carnegie’s holdings and other steel companies as U.S. Steel. Following the Panic of 1893, the bank arranged for an acquisition of $62 billion of precious metals from Europe to help strengthen the US Treasury, and in the period of the Panic of 1907 J.P. Morgan himself called the major financiers to come together to plan the financing which prevented the collapse of the nation’s money system. This is the profile of a bank that is a merchant along similar to such historic financiers like the Medici, the Fuggers and the Rothschilds.
The present-day JP Morgan is the closest thing to such a bank remaining in existence in the entire world. Its CEO Jamie Dimon, who has led JP Morgan Chase since 2005 is the closest personal leader to the merchant bankers of old. Under his direction, JPM has overtaken larger foreign banks and established its position as the world’s #1. Dimon has been compared to Warren Buffett as one of the two most admired business leaders of today. His annual shareholder letters compete with Buffett’s for popularity and the hope that they’ll be a source of useful information to investors. The running of JPM which is a major company with companies in several countries is like having an empire. And as happens with Buffett, his position provides daily information from its several divisions , allowing him to keep his fingers on the latest global business developments.
Understanding the context of this is an essential initial step to fully comprehending the prospects of JP Morgan for 2022 and the near future. It combines ordinary consumer/community banking, investment banking and high-end wealth management on a scale which is large enough for it to be able to identify the “mass wealthy” and wealthy in its reporting results. The only U.S. bank comes close in terms of balance and the relative importance of the distinct areas. Although four Chinese banks and an Japanese bank are larger in some ways, (JPMorgan is ranked as the sixth largest worldwide), JPM is by far the most important bank in the world. It is among the top 10 companies by market capitalization in the Vanguard S&P 500 Index ETF (VOO) and is the second-highest ranked in the Vanguard S&P Value Index ETF (VOOV) In both cases ranking just in front of Berkshire Hathaway (BRK.A)(BRK.B).
Its status as the top-ranked merchant bank frames the question of its performance this year. Investors who invest in bank stocks might be confused by the fact it is JP Morgan, the bluest of blue chip banks, is cheaper than the second highest ranked bank, Bank of America (BAC). Based on Prices Earnings Ratio (P/E), the JPM’s ratio for P/E BAC is 27.5 percentage higher than that of JPM (13.86 as opposed to 11.05). JPM is therefore more expensive in that vast margin. Is that rational? The answer lies in the market’s perception of the economy. Being a bank that is heavily weighted toward consumer banking, Bank of America should profit more from higher rates of interest and a booming economy. JP Morgan’s valuation is being penalized for its lack of an economic sensitivity as well as increasing rates.
There are two different ways to look at this. Short version: if the economy continues to run hot with high rate of inflation JPM may not do as as well as other major banks – this year anyway. It’s not all bad. It’s still a consistent and extremely profitable bank that thrives in times of prosperity as well as in bad. If the economy is doing less than expected, it will shine like it did in 2008 and 2009 as numerous other financial institutions failed. In actual fact, JPM had to be forced through the Federal Reserve to accept TARP rescue funds in order that banks which were actually in big trouble would not make a splash. Its buyback program also reflects its profound conservatism. JP Morgan consistently buys back at least 2% or 3 percent of its shares preferring to have solid cash reserves whereas more aggressive banks including Bank of America have committed to use roughly 100 percent of their earnings to buyback shares this year. JPM also offers a regularly increasing dividend, with a yield of 2.42 percent for an overall shareholder return likely to be 4-4.5 percent.
The only thing that can offset the low return for shareholders could be JPM is extraordinarily cheap with 11.05 times earnings, a ratio suitable for financials that are going through tough times operationally, which JPM isn’t. Many contemporary bank investors have little memory of how banks were historically priced. Prior to the financial crisis of 2008 and 2009, banks were valued at a discount that was much less to the market P/E. If priced that way today the large banks as a whole might have a P/E of roughly 15. That would leave quite a bit of growth in capital for JP Morgan in 2022. Buybacks, safety, dividends and capital appreciation are quite a good mix. Bank of America, its principal competitor, could perform better with the growth of the economy and increasing interest rates. However, it comes with higher risk and is less able to accommodate an increase in valuation.
Breaking out some Operating Numbers for JPM
An excellent starting point is the breakdown of JP Morgan business sectors by the percentage of their contribution to revenues. The breakdown is as follows:
Consumer and Community Bank – 41.5%
Banks for Investment and Corporate Banking – 39.9 percent
Asset and Wealth Management – 11.3 percent
Commercial Banking 7.3% 7.3%
The breakdown of the sector’s relative contributions to revenues tells the tale that is the case with JP Morgan Chase as compared to other major U.S. banks. Of the above sectors one metric is the reason for the distinction from other major banks. Bank of America, Wells Fargo (WFC), and Citi (C) which are ranked in the same order by total size, are all much more concentrated in Consumer and Community Banking.
This is the reason for it being true that the three larger banks are more sensitive to economic conditions and rising rates. They have a higher percentage of their revenue and earnings closely linked to the interest earned from Community and Consumer loans. In its slide presentation on the quarter’s earnings, Bank of America estimated that the loan earnings would rise by $7.2 billion with a 100 basis points increase on interest rates. The forecast to JP Morgan is in the neighborhood of 10% less. This is despite JPM’s market cap is around 27% more. Consider this as follows that JPM’s sensitivity to market rates in its Consumer and Community lending is roughly the same as that of BAC and other large banks, but Consumer and Community lending makes up a far smaller part of its overall business.
The Total Non-Interest Income at JP Morgan is 33% higher than its Net Interest Revenue of $51,968, and the Interest Revenue on Loans at Bank of America is about the same as Non-Interest Income. This brings the picture of JP Morgan as a global bank that has a variety of revenue sources . Some of them are more stable than consumer loans. At the same time this means that JPM less sensitive to economic activity and the general state of rates.
JPM Stock Forecast – Quant Rankings, Factor Grades and Ratings
The overall Quant Rating of JPM is around 3.5 out of five. In the category of Diversified Banks, it is ranked 13 out of 47, and in the Financial Industry #158 among 615. Its overall rank is #932 of 4173. The overall score of 932 is very positive but it needs to be not forgotten that many ranking methods (Joel Greenblatt’s renowned “Magic Formula” value rankings of stocks that could beat the market comes to mind) do not include banks since their metrics are distinct from those of other companies. JPM’s already high rankings will likely rise in a system that fully understood the financial metrics. firms.
The most exact of ratings that apply to many readers on this site is JPM’s Dividend Gradings. JPM is ranked by the safety rating A+, B C for Yield, and A for Consistency. I think that gets it almost right. There aren’t many companies that have the stability and safety of JPM. Its yield is 2.42 percent, and it has increased its dividend every year for the past nine years. All things considered it deserves its spot on many lists of Dividend or Dividend Growth Stocks.
Several Factor Grades for other aspects are a bit baffling. The most objective and definitive one is Earnings Revisions, which is graded an A. Momentum is awarded a C+. This is mainly due to its status as JPM is a low beta stock. This means it is less volatile than the market both on the upside and downside. The market for large-cap stocks rose sharply. JPM simply does not move in the same way as the tech sector, which are highly speculative stocks, or stocks in more cyclical industries, however its Momentum has recently been strongly positive while many of the more exciting parts of the market have plunged dramatically. The growth numbers aren’t particularly impressive but probably deserve an upper grade than D+. Its Profitability Grade has its F rating due to not being graded on several indicators. Concerning Valuation The D+ rating is a head-scratcher.
What makes a company with a steady growth in dividends and earnings and an 11-year P/E rate earn an D+ for Valuation. Ben Graham suggested that an ordinary business with no growth deserved a P/E ratio of 15, and JPM is more than an ordinary company. One can make the argument that analysts as a group and the majority of them have no memories of normal times prior to 2008, aren’t able to realize how inexpensive all major banks are when measured in relation to their historical performance. Of the banks, one could say that an all-weather lender like JP Morgan shouldn’t trade at just a 27.5% reduction compared to Bank of America even if BAC is expected to have higher earnings growth in the coming year.
Competitors, Buybacks, And Risks
JP Morgan’s competitors within the handful of banks that are major do not pose a huge issue. The majority of full-service banks accomplish almost the exact thing , in more or less the same manner. Customer loyalty is extremely high and the annoyance of switching banks is a powerful enough disincentive to act as moat.. The biggest risk is the Fintech startups. Jamie Dimon has made it clear in his recent annual shareholder letters that he sees these startups as the biggest issue which is why JPM has taken significant steps to counter the challenges of technology, like bitcoin. Money is the primary product of banking and a bank with the scale as well as the reach and resources as JP Morgan is well positioned to compete with the new challengers.
In his 2020 shareholder letter as well as in the conference call after the Q3 report on earnings CEO Dimon has emphasized the fact that startup fintech companies are not held to the standards of regulation set by banks. He sees this as not just a disservice to the general public, but also an unfair competitive disadvantage for banks that must comply with strict regulations and incur substantial costs to meet them. To address this, he said However, he stated that he was not expecting government intervention to address this problem in the foreseeable future and added that JPM will continue to compete vigorously in the present environment in spite of its unfairness. In the same paragraph , he stated that limiting buybacks to only a small amount was part of allocating capital to achieve organic growth and solve competitive issues. From an investor’s point the perspective, it’s an ordinary business risk.
Recommendation for JPM Stock
JP Morgan Chase is an extremely stable and safe bank and an excellent investment option for 2022. In the current economy, conditions that are transforming and interest rates appear to be the ideal conditions for banks. JPM will take part. If the economy is booming and interest rates are rising rapidly, Bank of America and some other banks could increase their profits and buybacks more than usual, however for investors who are looking to invest over the long term, JPM is a reliable and stable power that give it less risk. Investors have to take their own decisions as to the tradeoff they prefer. I own both banks in large size as major parts of my investment portfolio. I also have Bank of America which I bought years ago when it was much less expensive. I’ll pay close attention to JPM’s forthcoming earnings report and the earnings call.
