JP Morgan Chase (NYSE:JPM) has a rich history that dates through the 19th century. It was the primary source of funding to the American railroad system, as well as consolidating Andrew Carnegie’s assets and other steel corporations to form U.S. Steel. After the Panic of 1893, it was able to arrange the purchase of $62 billion in precious metals from Europe to 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 that prevented the demise of the country’s financial system. This is the model of a bank that is a merchant along the model of such historical financiers such as the Medici and the Fuggers, as well as the Rothschilds.
The present-day JP Morgan is the closest thing to a bank like this that is still in existence. The CEO Jamie Dimon, who has been in charge of JP Morgan Chase since 2005 is the most similar person to merchant banks of the past. Under his direction, JPM has outperformed bigger foreign banks and established itself as the top bank in the world. Dimon is ranked alongside Warren Buffett as one of the two most admired business leaders of the current era. The annual shareholder letters rival Buffett’s in popularity and the belief that they’ll provide valuable information to investors. The running of JPM which is a major company with operations in a variety of countries is like managing an empire. As it is with Buffett his job, it provides daily updates from its various divisions , allowing him to stay on the latest global business trends.
Understanding the context of this is a crucial first step to understand the future prospects of JP Morgan for 2022 and in the near future. It blends traditional consumer and community banking, investment banking and high-end wealth management at a scale that is large enough for it to distinguish the “mass wealthy” and wealthy in its reporting results. There is no other U.S. bank comes close in terms of balance and the relative importance of the different groups. Although the four Chinese banks as well as the one Japanese bank are bigger in some ways, (JPMorgan is ranked as the sixth largest worldwide), JPM is by far the most powerful bank in the world. It is one of the top ten companies by market capitalization within the Vanguard S&P 500 Index ETF (VOO) and is ranked as the #2 on the Vanguard S&P Value Index ETF (VOOV) and in both instances, it is ranked just ahead of Berkshire Hathaway (BRK.A)(BRK.B).
Its status as the world’s top merchant bank raises the question of its performance in the current year. Bank stock investors may be a bit confused by the reality the fact that JP Morgan, the bluest of blue chip banks, is less expensive than the second largest bank in the rankings, Bank of America (BAC). Based on price earnings ratio (P/E) which is a measure of profitability, the ratio of BAC is 27.5 percent higher than the one of JPM (13.86 against 11.05). JPM is therefore cheaper by that huge margin. Does that make sense? The answer is in the market’s estimation of the state of the economy. Since it is a bank heavily geared towards consumer banking, Bank of America should profit more from the rising rates of interest and a booming economy. JP Morgan’s value is being punished for its lack of economic sensitivity and increasing rates.
There are two ways to look at this. The simple version is that If the economy continues to be hot and the high rate of rates of inflation JPM is likely to do less effectively than the other banks, at least this year. This isn’t too bad. It’s still a reliable 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 when numerous other financial institutions failed. In actual fact, JPM had to be forced through authorities at the Federal Reserve to accept TARP funds to ensure that banks that were in serious trouble wouldn’t be able to stand out. The buyback policy of JPM also shows its profound conservatism. JP Morgan consistently buys back up to 3% or 2 percent of its shares, preferring to have large cash reserves, while banks that are more aggressive like Bank of America have committed to using around 100 percent of their earnings to buyback shares this year. JPM also has a increasing dividend, with a yield of 2.42 percent for an overall return to shareholders that is likely to be 4-4.5 percent.
A small part of the reason for the low return for shareholders can be the reality that JPM is incredibly cheap with 11.05 times earnings, which is a ratio that is suitable for banks going through tough times operationally, something JPM isn’t. A lot of bank investors today do not remember how banks were historically priced. Prior to the 2008-2009 crisis, banks were valued at a lower discount to the P/E of the market. If they were priced this way today the large banks in general could have a P/E around 15. This leaves plenty of room for the capital value to appreciate for JP Morgan in 2022. Buybacks, safety, dividends and capital appreciation are an excellent combination. Bank of America, its most prominent competitor, could do better with a strong growth rate in the economy and increasing interest rates, however it is more risky and less room for an increase in valuation.
Looking at Operating Numbers for JPM
An excellent starting point is to break down the JP Morgan business sectors by the proportion of the revenue they generate. The following are the categories:
Consumer and Community Bank Consumer and Community Banking 41.5 percent
Banks for Investment and Corporate Banking Corporate and Investment Banking 39.9 percent
Asset and Wealth Management – 11.3 percent
Commercial Banking Commercial Banking 7.3 percent
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. From the above categories one metric is the reason for the differences between other major banks. Bank of America, Wells Fargo (WFC), as well as Citi (C) which are ranked in this order according to their total size, are much more focused on Consumer and Community Banking.
This is due to this fact. All three of the larger banks are more sensitive to economic conditions and the rising rate. The majority of their revenue and earnings closely linked to the interest earned from Community and Consumer loans. In its slide presentation of the quarter’s earnings, Bank of America estimated that the loan earnings would rise by $7.2 billion by a 100 basis-point rise of interest rates. The JPM stock forecast is in the range of 10 percent less. This is despite the fact that JPM’s market cap is around 27% more. Consider it this way the sensitivity of JPM to the market rate in 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 the company’s total operations.
The Total Non-Interest income from JP Morgan is 33% more than its Net Interest Revenue of $51,968, while the interest revenue on loans from Bank of America is about the same as Non-Interest Revenue. This is a good illustration of JP Morgan as a global bank that has a variety of revenue sources , some of which are inherently better positioned than consumers loans. In addition, this means that JPM less receptive to the economic environment and the general rate of interest rates.
Quant Rating, Factor Grading, and Ratings
On this website, 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, as well in the Financial Industry 128 from 615. Its overall ranking is 932 out of 4173. The overall rank of 932 is very positive however it must be kept in mind that many ranking methods (Joel Greenblatt’s famous “Magic Formula” value rating of stocks that are expected to beat the market comes to the mind) do not include banks since their metrics are different from other companies. JPM’s high ranking will likely rise in a system that completely understood the financial metrics. firms.
The most accurate of the rankings that are applicable to a lot of readers on this website are the Dividend Grades of JPM. JPM is rated with an A- for safety, Bfor 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. The yield is solid 2.42 percent and it has increased its dividend every year for the last nine years. It is certainly worthy of its spot on many lists of Dividend and Growth Stocks.
Different Factor Grades for different aspects are a bit baffling. The most objective and definitive one is Earnings Revisions, which earns an A. Momentum is awarded an C+. This is mainly due to its status as JPM is an extremely low beta stock. This means it is more stable than the market on the up and downside. The market for large-cap stocks jumped dramatically. JPM isn’t moving like technology stocks, speculated stocks, or those that are in more cyclical sectors, however, its Momentum has been recently positive, while other more exciting parts of the market have plunged sharply. The growth numbers aren’t particularly impressive however, they could be worthy of an upper grade than D+. And its Profitability Grade is the reason for its F rating. not being graded on a variety of indicators. In terms of Valuation and Profitability Grade, the D+ rating is an eye-scratcher.
What makes a company that is growing its dividends and earnings and an P/E ratio of 11 get an D+ for valuation. Ben Graham suggested that an ordinary business with no growth should have a P/E ratio of 15, and JPM is far more than an ordinary business. It is possible to argue that analysts in general who have no memory of the normal times prior to 2008, do not fully comprehend how affordable all major banks are when measured against their long-term histories. In the case of banks, it is possible to claim that an all-weather institution such as JP Morgan shouldn’t trade at an 27.5 percent reduction compared to Bank of America even if BAC could be expected to be able to grow its earnings more in the next year.
Purchasebacks, Competitors, and Risks
JP Morgan’s rivals among the handful of banks that are major are not a major issue. All full-service banks perform almost the exact things in much the same manner. The customer loyalty of the banks is high and the hassle of changing banks is a powerful enough disincentive to act as moat.. The biggest risk is the startup companies in the field of fintech. Jamie Dimon has made it clear in his recent annual shareholder letters that he views these startups as the biggest threat as well. JPM has taken significant steps to combat the threats of technology, such as bitcoin. Money is the main bank product and banks with the size as well as the reach and resources that are available at JP Morgan is well positioned to compete with the new challengers.
In his shareholder letter for 2020 and in his conference call after the Q3 report on earnings, CEO Dimon has brought attention to the fact that fintech startups firms aren’t held to the same standards as actual banks. Dimon believes this is not just a disservice to the general public, but also an unfair disadvantage to banks that have to meet strict regulatory requirements and incur substantial costs to meet them. In response to this issue However, he stated that he didn’t expect government intervention to address the issue in the near future , and stated that JPM will remain competitive in the current environment spite of the unfairness. In the same sentence, he stated that limiting buybacks to an amount that is small was aspect of distributing capital to boost organic growth and solve competitive issues. From the perspective of an investor’s perspective, it’s just a normal business risk.
Recommendation for JPM Stock
JP Morgan Chase is an extremely secure and stable bank and is a great investment for 2022. The current economic conditions and interest rates appear to be perfect for banks. JPM is likely to participate. If the economy is hot and interest rates are rising rapidly, Bank of America and some other banks could raise profits and buybacks at higher rates, however for investors who are looking to invest over the long term, JPM offers stability and ability that provide the lowest risk. Investors must decide for themselves as to which option they would prefer. I have both of these banks in large sizes as major components of my investment portfolio. I also own Bank of America which I purchased years ago, when it was much less expensive. I’ll be paying attentively to JPM’s upcoming earnings report as well as the earnings conference call.
