JP Morgan Chase (NYSE:JPM) has a rich history that dates through the 19th century. It provided a large portion of financing that was needed for the American railroad system, as well as consolidating Andrew Carnegie’s assets and other steel corporations as U.S. Steel. In the aftermath of the Panic of 1893, it was able to arrange an investment of $62 billion in gold from Europe to help strengthen the US Treasury, and in the middle of the Panic of 1907 J.P. Morgan himself called the major financiers to come together to plan the financing, which prevented the demise of the country’s financial system. This is the description of a commercial bank following the lines of such historic financiers such as the Medici and the Fuggers and the Rothschilds.
Today’s JP Morgan is the closest to a bank of this type which is still operating in the world. Its CEO Jamie Dimon, who has been in charge of JP Morgan Chase since 2005 and is the closest leader to the merchant bankers of the past. Under his direction JPM has outperformed larger foreign banks and established dominance as the world’s #1. Dimon is on par with Warren Buffett as one of the two most revered business leaders of the current era. And his annual shareholder letters are in competition with Buffett’s and the hope that they’ll offer useful information to investors. Operating JPM, which has important business operations across the globe, is something like running an empire and as like Buffett his job, it provides daily reports from its many divisions enabling him to keep his fingers on the pulse of business trends.
Understanding this context is a crucial first step to comprehend the outlook for JP Morgan for 2022 and in the near future. It combines ordinary consumer/community banking, investment banking and high-end wealth management at a scale that is large enough for it to distinguish the “mass affluent” and wealthy in its reporting results. There is no other U.S. bank comes close in terms of balance or the relative importance of each of the different areas. While five Chinese banks as well as one Japanese bank are larger by some measures, (JPMorgan is the 6th most influential bank globally), JPM is by far the most important bank in the world. It is among the top 10 stocks in terms of market cap of the Vanguard S&P 500 Index ETF (VOO) and is ranked as the #2 for the Vanguard S&P Value Index ETF (VOOV) In both cases ranking just in front of Berkshire Hathaway (BRK.A)(BRK.B).
Its place as the world’s top merchant bank raises the question of its performance in the current year. Investors who invest in bank stocks might be a bit confused by the facts there is a reason that JP Morgan, the bluest of blue chip banks is less expensive than the second ranked large bank, Bank of America (BAC). According to the Price Earnings Ratio (P/E), the rate of BAC’s P/E BAC is 27.5% higher than JPM’s JPM (13.86 against 11.05). JPM is therefore cheaper by that huge margin. Are they rational? The answer lies in the market’s assessment of the economy. Because it is a financial institution heavily geared to consumer banking, Bank of America should profit more from higher interest rates and a growing economy. JP Morgan’s valuation is being devalued for its inability to show sensitiveness to the economy and the rising interest rates.
There are two different ways to look at this. The short version is that If the economy continues to grow at a rapid pace with high inflation, JPM may not do as in comparison to other banks – this year anyway. It’s not all bad. It’s still a reliable and very profitable bank that is successful in both good as well as in bad. When the economy performs less well , the bank will shine as it did during 2008-2009 when many other financial institutions failed. In actual fact, JPM had to be coerced to accept TARP funds by the Federal Reserve to accept TARP bailout funds so that banks which were actually in the midst of a crisis would not be able to stand out. Its buyback program also reflects its deep conservatism. JP Morgan consistently buys back up to 3% or 2 percent of its shares, preferring to maintain solid cash reserves whereas more aggressive banks including Bank of America have committed to use roughly 100% of total earnings for buybacks this year. JPM also has a rising dividend with a yield of 2.42 percent, for an overall shareholder return that is likely to be 4-4.5%.
One thing that could offset the rather low return for shareholders could be JPM is incredibly cheap for 11.05 times earnings, which is a ratio that is suitable for banks going through tough times operationally, which JPM isn’t. Many contemporary bank investors are unaware of the manner in which banks were priced. Prior to the 2008-2009 crisis, banks were priced at a lower discount to market P/E. If they were priced this way today, large banks would have a ratio of 15. The JPM stock forecast shows this could leave plenty of an increase in the value of capital JP Morgan in 2022. Safety, dividends, buybacks, and capital appreciation are a pretty good combination. Bank of America, its main competitor, may do better in times of strong growth in the economy and rising rates of interest, but it has a higher risk and has less space for valuation increase.
Presenting Some Operating Numbers For JPM
A good starting point is to break down the JP Morgan business sectors by the revenue they generate. They are as follows:
Consumer and Community Bank – 41.5%
Financial Services for the Corporate and Investment – 39.9%
Asset and Wealth Management – 11.3%
Commercial Banking 7.3% 7.3 percent
The breakdown of the sector’s relative earnings tells the tale that is the case with JP Morgan Chase as compared to the other large U.S. banks. Of the three sectors mentioned above there is a single measure that explains the differences from other banks. Bank of America, Wells Fargo (WFC) and Citi (C) placed in this order according to the size of their combined operations, are much more placed in Consumer and Community Banking.
This distinction is a result of it being true that the three larger banks are more receptive to the state of the economy and the rising rate. Much more of their revenues and earnings closely linked to interest earnings from Community and Consumer loans. In its slide presentation for Q3 results, Bank of America estimated that loan income would increase by $7.2 billion with a 100 basis point rise on interest rates. The expectations of JP Morgan is in the area of 10% less. This is despite the fact that JPM’s market capitalization is approximately 27% higher. Imagine this in this way: JPM’s sensitivity for market interest rates within its Consumer and Community lending is similar to that of BAC and other banks with large capital However, Consumer and Community lending makes only a small portion of its total business.
The Total Non-Interest income of JP Morgan is 33% more than its Net Revenue of $51,968 while the Interest Revenue on loans in Bank of America is about the same as the Non-Interest Income. This is a good illustration of JP Morgan as a global bank with a wide range of revenue sources , some of which are much more secure than loans. This means that JPM less receptive to the economic environment and the general trend of interest rates.
Quant Ranking, Factor Grades and Ratings
On this site , the overall Quant Rating of JPM is 3.5 out of five. Within Diversified Banks it is ranked 13 out of 47, as well in the Financial Industry #158 among 615. Its overall ranking is #932 of 4173. The overall score of 932 is pretty good but it needs to be noted that a lot of ranking methods (Joel Greenblatt’s renowned “Magic Formula” value ranking of stocks that should beat the market comes to mind) do not include banks since their primary metrics are different from other businesses. JPM’s already high rankings will likely rise with a system that recognized the metrics of financial firms.
The most precise of the rankings that are applicable to many readers on this website are JPM’s Dividend Gradings. JPM is rated by the safety rating A+, B- for Growth, C for Yield and A- for Consistency. I believe that’s just right. There aren’t many companies that have the security and stability of JPM. Its yield is a solid 2.42% and it has increased its dividend every year for the last nine years. It is certainly worthy of its place on a variety of lists of Dividend or Dividend Growth Stocks.
Many Factor Grades for the other aspects are a bit baffling. The most objective and definitive one is Earnings Revisions, which receives an A. Momentum receives an C+. This score mainly reflects the fact that JPM is a low beta stock. It is more stable than the market both on the up side and the downside. The market for large-cap stocks increased dramatically. JPM simply does not move in the same way as the tech sector, which are highly speculated stocks, or stocks in more cyclical industries however its Momentum has been recently positive while many of the jazzier parts of the market have fallen precipitously. The growth numbers aren’t particularly impressive however, they could be worthy of a higher ranking than D+. The Profitability grade has its F rating due to not being graded on a variety of measures. As to Valuation as a whole, the D+ ranking is truly an eye-scratcher.
How can a solid company with a steady growth in dividends and earnings and an 11-year P/E rate earn a D+ for evaluation. Ben Graham suggested that an ordinary company with zero growth would be able to get a P/E of 15, and JPM is more than an ordinary business. One can make the argument that analysts in general, most of whom have no memories of normal times before 2008, don’t fully understand how low all major banks are by their history over the long term. In the case of banks, it is possible to claim that an all-weather institution such as JP Morgan shouldn’t trade at just a 27.5 percent reduction compared to Bank of America even if BAC could be expected to have higher earnings growth in the next year.
Risks of Buybacks, Competitors and Risks
JP Morgan’s competitors among the handful of banks that are major do not present a serious issue. All full-service banks perform almost the exact things in much the same manner. Customers are extremely loyal and the hassle of switching banks is enough of a disincentive to act as a moat.. The most significant risk is that of new fintech companies. Jamie Dimon has made it clear in his recent annual shareholder communications that he views these startups as the major issue in the future. JPM has taken significant steps to counter the challenges of technology, like bitcoin. Money is the major product of banking and banks with the size as well as the reach and resources in the hands of JP Morgan is well positioned to engage the new challengers.
In his shareholder letter for 2020 and also in the conference call after the Q3 earnings report, CEO Dimon has called attention to the fact that startup fintech companies are not subject to the regulatory standards of banks. Dimon sees this as more than just a disservice for the public, but the cause of an unfair disadvantage to banks that have to meet strict regulatory requirements and incur massive costs in order to be compliant. In response to this issue However, he said that he didn’t expect the government to remedy the issue in the near future and further stated that JPM will remain competitive in the current environment spite of the unfairness. In the same sentence, he stated that limiting buybacks to a modest amount was a part of allocating capital to help grow organically and solve competitive issues. From an investor’s point of viewpoint, it’s a typical business risk.
Recommendation for JPM Stock
JP Morgan Chase is an extremely secure and stable bank and a good investment for 2022. The current economic conditions and interest rates could be ideal for banks. JPM will take part. If the economy is hot and interest rates increase dramatically, Bank of America and a few other banks may raise profits and buybacks at more than usual, however for the investor who is looking for a long-term investment, JPM is a reliable and stable capability that gives it less risk. Investors must make their own decision as to the type of investment they’d like to make. I have both of these banks in large sizes as major components in my overall portfolio. I also have Bank of America which I bought years ago in the days when it was a lot cheaper. I will be paying closely to JPM’s latest earnings report and earnings conference call.
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