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Investment Overview for JPMorgan Chase (NYSE:JPM)
Below are key drivers of JPMorgan's value that present opportunities for upside or downside to the current Trefis price estimate for the banking group:
Sales & Trading
- Yield on Trading Assets: JPMorgan's trading yield has been around 5% in recent years, after recovering from lows of 1.4% in 2008 at the peak of the global economic crisis. While we estimate yield figures to remain relatively steady at this level going forward, should the division perform worse than expected in coming years, the yield could decrease to below 4% over the Trefis forecast period. If that were to occur there would a downside of nearly 6% to the Trefis price estimate.
- Investment Banking Operating Margins: JPMorgan's investment banking business normally reports margins in the range of 36%-38%. We forecast an improvement in margins to around 40% in the years to come. However, if these margins do not grow at the rate we currently forecast, and remain around 36% over our forecast period then there would be a downside of about 5% to the current price estimate.
JPMorgan Chase is a diversified financial services institution with operations spread cross the world. The largest bank in the U.S. in terms of total assets, JPMorgan is a leader in providing credit & debit cards and mortgages as well as investment banking, wealth management and sales & trading services.
Through its various business segments, JPMorgan serves millions of consumers in the U.S. and many of the world’s most prominent corporate, institutional and government clients across the globe.
Diversified business model driving sustained growth
JPMorgan is a market leader in nearly every financial service, which includes retail banking, commercial banking, investment banking and even custody banking. This diversified business model allows the bank to provide its customers - individual and institutional - a wider range of services. Moreover, the business model also brings in significant cross-selling opportunities that are not readily available to its competitors.
Stronger Operating Margins compared to other divisions
The Sales and Trading division of JPMorgan, historically has had strong operating margins compared to other divisions in the firm.
The past couple years have been tough for the global economy, particularly the banking sector. Even as the world economy recovers, economists have predicted that the pace of recovery will be modest. At a time when many other competitors such as Citigroup and Bank of America were haunted with the possibly of a collapse, JPMorgan performed much better than the rest because of its relatively conservative stance in home loan originations and other products. In fact JPMorgan never faced a quarterly loss during the downturn. Overall the banking sector still faces headwinds due to high levels of unemployment which are leading to banks increasing their cash reserves and tightening lending standards.
Regulatory reforms expected to pressurize revenue growth going forward
- Increased regulation on the financial industry is expected to reduce the top line for most financial institutions. In the past, decreased regulation led to greater risk-taking for many parts of the businesses, which drove earnings growth. Analysts at Goldman Sachs have said that new regulations could cut bank earnings by nearly 13%, with larger banks such as Bank of America and Citigroup expected to lose up to 25% of their earnings power moving forward. Regulation is expected to affect the banking industry in several ways:
- Banks will be required to hold additional amounts of capital which will slow lending growth
- The CARD Act passed by the congress is expected to reduce income by prohibiting issuers from raising rates, fees or finance charges on existing balances or on prospective accounts in the first year
- The Volcker rule will force banks to scale back trading operations
- Securitization will become less appealing as investors and regulators will demand that banks retain some risk as well
Strong Capital Position
JPMorgan has a strong liquidity and capital position across its lines of businesses. The average loans-to-deposit ratio for the country's eight biggest commercial banks was just under 90% in Q4 2012. In comparison, JPMorgan's loans-to-deposit ratio was the lowest at 61%, indicating its strong liquidity position. Its Tier 1 Capital Ratio was 12.6% in Q4 2012 compared to 8.4% in 2007. Its Tier 1 common capital ratio also rose to 11% by Q4 2012 from 7% in 2008. This strong liquidity and capital position will enable the company to meet its short-term and long-term obligations without facing any difficulty
Improvements in Efficiency
The JPMorgan Chase and Bank One Merger has led to improvements in efficiency for the firm. As a result of consolidating operating platforms, data centers financial and risk systems the company’s costs have declined significantly as determined by the service per dollar of revenue. If the company were running at the same cost per dollar of revenue as in 2005, it would have added nearly $9 billion of increased technology, operations and overhead costs.
Acquisitions have helped grow the company’s business lines
Past acquisitions, most notably those of Bear Stearns and Washington Mutual, have helped increase the Investment Banking and retail banking business for JPMorgan. In 2008 Washington Mutual operated in nearly 15 states and had more than 2,239 retail locations across the U.S.
Leader in Retail Banking
JPMorgan competes with Bank of America and Wells Fargo mostly in the retail banking business. It currently has more than 5,500 branches across 23 states.
Dominant Position in Investment Banking
JPMorgan holds a strong position in the Global Investment Banking space. For each of the years 2011 and 2012, it earned the most global advisory, debt origination and equity & equity-related underwriting fees, according to Thomson Reuters.
Consolidation expected to continue
As a result of the financial crisis, the banking industry saw a period of mergers and consolidation. The financial crisis has seen nearly 15-20% of market share change hands. The banking industry continues to see consolidation in almost every aspect of the business as players try and globalize and seek scale. Customers are also increasingly becoming more risk averse and turning to larger players with stronger deposit bases due to uncertainty. The number of operating commercial banks declined from 7,630 in 2004 to 6,096 at the end of 2012.
Trefis Forecast Rationale for Average Real Estate Portfolio Size
Represents the total dollar value of JPMorgan's Real Estate Portfolio.
The Real Estate Portfolio size grew rapidly from 2007 to 2009 - more than doubling from $134 billion to $271 billion - owing to the boom in real-estate during the period. With the economic downturn hitting real estate hard, the portfolio declined to $187 billion by 2012, and we expect it to decline further in the years to come.
Trefis considered the following factors for its forecast.
Back to Company Overview
- Housing market recovery likely to take significant time
- Record foreclosures, excess inventory and distressed home sales have put pressure on home prices. Additionally, new home construction has been sluggish. While we expect the housing market to eventually bounce back somewhat, the bank's real estate portfolio is likely to shrink in the next few years due to these factors.
- Banks working to reduce real estate exposure
- The growing concerns among investors about banks' real estate exposure has led to most banks cutting back their real estate portfolios in recent years.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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