JP Morgan Chase (NYSE:JPM) has a storied history going into the 19th Century. It provided a large portion of funding to the American railroad system as well as consolidating Andrew Carnegie’s holdings and other steel firms to form U.S. Steel. After the Panic of 1893, the bank arranged for an investment of $62 billion worth of gold from Europe to shore up the US Treasury, and in the period of the Panic of 1907, J.P. Morgan himself called major financiers together to organize the financing, which prevented the collapse of the nation’s money system. This is the description of a merchant bank along the same lines as such historical financiers such as the Medici, the Fuggers along with the Rothschilds.
The present-day JP Morgan is the closest thing to a similar bank which is still operating in the world. Its CEO Jamie Dimon, who has managed JP Morgan Chase since 2005 is the closest personal executive to bankers who worked for merchants of old. Under his direction JPM has outperformed larger foreign banks and established its position as the top bank in the world. Dimon is on par with Warren Buffett as one of the two most admired business leaders of our time. In his annual shareholder letter, he will compete with Buffett’s for popularity and the hope that they’ll provide valuable information to investors. Operating JPM which is an important company with operations in a variety of countries it is akin to running an empire and as like Buffett his position, it gives daily data from the company’s various divisions that allow him to keep his eye on the pulse of business developments.
Understanding this context is a crucial first step to comprehend the outlook for JP Morgan for 2022 and the near future. It combines ordinary consumer/community banking with investment banking as well as high-end wealth management at a scale that is large enough to break out the “mass wealthy” and affluent results. The only U.S. bank comes close in terms of balance and the relative importance of the different groups. Although the four Chinese banks, and an Japanese bank are more powerful in some ways, (JPMorgan is the 6th most influential bank globally), JPM is by far the most influential bank on the planet. It is among the top ten stocks by market cap of the Vanguard S&P 500 Index ETF (VOO) and is ranked second within the Vanguard S&P Value Index ETF (VOOV) as well, with both instances, it is ranked just ahead of Berkshire Hathaway (BRK.A)(BRK.B).
Its status as the world’s top merchant bank frames the question of its performance in the current year. Investors in bank stocks may be puzzled by the reality there is a reason that JP Morgan, the bluest of blue chip banks, is cheaper than the second largest bank in the rankings, Bank of America (BAC). In terms of P/E ratio (P/E) The P/E of BAC is 27.5% higher than JPM’s JPM (13.86 versus 11.05). JPM is thus cheaper by that huge margin. Does that make sense? The answer lies in the market’s perception of the state of the economy. Because it is a financial institution heavily geared towards consumer banking Bank of America should profit more from the rising interest rates and a growing economy. JP Morgan’s stock is being devalued for its inability to show an economic sensitivity as well as the rising interest rates.
There are two different ways to look at this. Short version: If the economy continues to get hot, with the high rate of levels of inflation, JPM might not fare as effectively than the other banks – in the current year at least. It’s not all bad. It’s a stable and very profitable bank that is successful in both good and bad. When the economy does less then it will be able to shine as it did in 2008-2009 as many other financials failed. In actual fact, JPM had to be forced from authorities at the Federal Reserve to accept TARP funds to ensure that banks that were in serious trouble wouldn’t stand out. The company’s buyback policy reflects its deep conservatism. JP Morgan consistently buys back at least 2% or 3% of its shares, choosing to hold solid cash reserves whereas banks with more aggressive policies like Bank of America have committed to using approximately 100% of its earnings to fund buybacks in the coming year. JPM also has a rising dividend with a yield of 2.42% for an overall return to shareholders expected to be 4-4.5%.
Somewhat offsetting the relatively low shareholder return is the fact that JPM is extraordinarily cheap in the market at 11.05 times earnings, a ratio suitable for financials that are going through tough times operationally. JPM is not. Many contemporary bank investors have little memory of the way that banks were priced. Prior to the 2008-2009 crisis, banks were valued at a much lower discount to market P/E. If priced that way today larger banks in general could be able to achieve a P/E of around 15. This leaves plenty of growth in capital for JP Morgan in 2022. Security, dividends, buybacks, and capital appreciation are an excellent combination. Bank of America, its leading competitor, might do better in times of strong growth in the economy and higher interest rates. However, it has a higher risk and is less able to accommodate valuation increase.
Breaking out some Operating Numbers for JPM
The best place to start is to break down the JP Morgan business sectors by their contribution to revenues. The following are the categories:
Consumer and Community Bank Consumer and Community Banking 41.5%
Financial Services for the Corporate and Investment (C&I) – 39.9 percent
Asset and Wealth Management – 11.3 percent
Commercial Banking Commercial Banking 7.3 percent
This breakdown into the relative sector contribution to revenue tells the story that is the case with JP Morgan Chase as compared to other major U.S. banks. In the above three sectors one metric is the reason for the differences between other banks. Bank of America, Wells Fargo (WFC) as well as Citi (C), ranked in that order based on the size of their combined operations, are significantly more focused on Consumer and Community Banking.
This distinction is a result of the fact that all three major banks are more receptive to the state of the economy and the rising rate. A much higher proportion of their business has revenue and earnings that are closely tied to interest earnings from loans to Community and Consumer. In its slide presentation for Q3 results, Bank of America estimated that loans would earn an increase of $7.2 billion when a 100 basis point increase in interest rates. The expectations to JP Morgan is in the range of 10 percent less. This is despite JPM’s market cap is about 27% larger. Think of it this way that JPM’s sensitivity to market rates in its Consumer and Community lending is approximately the same as the sensitivity of BAC and other banks with large capital, but Consumer and Community lending makes an even smaller portion of its overall business.
The Total Non-Interest Income from JP Morgan is 33% greater than its Net Interest Revenue of $51,968, whereas the Interest Revenue on Loans of Bank of America is about equal to Non-Interest Income. That rounds out the picture of JP Morgan as a global institution with multiple revenue sources , some of which are better positioned than consumers loans. In addition, this creates JPM less receptive to economic conditions and the general state of interest rates.
Quant Rankings, Factor Grades and Ratings
On this site , the overall Quant Rating of JPM is 3.5 out of 5. Among Diversified Banks, it is ranked #13 out of 47 as well in the Financial Industry #158 out of 615. Its overall ranking is #932 of 4173. The overall score of 932 is quite good but it is remembered that many ranking methods (Joel Greenblatt’s famous “Magic Formula” value rating of stocks that are expected to beat the market comes to memory) exclude banks because their key metrics are so distinct from those of other businesses. JPM’s already high rankings will likely rise with a system that understood the financial metrics. businesses.
The most exact of rankings that can be applied to a lot of readers on this site are the Dividend Grades of JPM. JPM is ranked as A+ in Safety, B- for Growth, C for Yield, and A for Consistency. I think this is close to the mark. Few companies can boast the stability and security of JPM. Its yield is a solid 2.42 percent and it has raised its dividend each year for the past nine years. Overall, it is worthy of its place on a variety of lists of Dividend and Growth Stocks.
Many Factor Grades for the other features are confusing. The primary and most reliable one is Earnings Revisions, which is graded an A. Momentum is awarded an C+. This is mainly due to it being a JPM is a low beta stock. This means it is less volatile as the market on the up and down side. In the last year, the market for large cap stocks surged dramatically. JPM simply doesn’t move as much as technology stocks, speculative stocks, or stocks in more cyclical industries, however its Momentum has recently been strongly positive, while other jazzier parts of the market have plunged sharply. Its Growth numbers aren’t spectacular however they are likely to merit an upper grade than D+. Its Profitability Grade gets its F ranking from the fact that it is not graded on many metrics. In terms of Valuation, the D+ ranking is an eye-scratcher.
How does a solid business that has a growing dividend and earnings and having a P/E of 11, get the grade of D+ for evaluation. Ben Graham suggested that an ordinary business with no growth deserved a P/E ratio of 15, and JPM is more than just an ordinary company. One could argue that analysts as a group and the majority of them have no experience of the past before 2008, don’t fully grasp how cheap all the major banks are when measured against their longer-term history. Of the banks, one could claim that an all-weather institution like JP Morgan shouldn’t trade at a 27.5% savings over Bank of America even if BAC is expected to see higher growth in earnings in the next year.
Purchasebacks, Competitors, and Risks
JP Morgan’s competitors among the handful of big banks do not pose a huge problem. All full-service banks do roughly the same process in roughly the same way. Customer loyalty is very high and the nuisance of changing banks is a strong enough deterrent to serve as moat.. The real threat is new fintech companies. Jamie Dimon has made it clear in recent annual shareholder letters that he sees these startups as the biggest challenge in the future. JPM has taken important measures to combat the threats of technology, such as bitcoin. Money is the main product of banking and an institution with the size, 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 following the Q3 earnings report, CEO Dimon has brought attention to the fact that startup fintech firms aren’t held to the same standards as actual banks. He believes that this is not just a disservice for the public, but the source of an unfair disadvantage to actual banks which must meet strict regulations and incur substantial costs to meet them. In response to the situation However, he stated that he was not expecting that the government would address this issue in the near future , and stated that JPM will continue to compete vigorously in the current market in spite of the unfairness. In the same paragraph , he stated that limiting buybacks to only a small amount was aspect of distributing capital to boost organic growth and deal with competitive issues. From the point of the perspective, it’s an ordinary business risk.
Recommendation for JPM Stock
JP Morgan Chase is an extremely safe and stable bank and an excellent investment option for 2022. A resurgence in the economy and interest rates appear to be optimal for banks. JPM will take part. If the economy is hot and interest rates go up, Bank of America and other banks might raise profits and buybacks at more than usual, however for the long-term investor the JPM stock forecast provides consistency and staying power that give it the lowest risk. Investors need to take their own decisions as to the tradeoff they prefer. I own both banks with large size as major parts of the portfolio. I also own Bank of America which I bought a few years ago when it was much cheaper. I’ll be paying attentively to JPM’s upcoming earnings report and earnings call.
