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In Q4 2020, JPMorgan reported Total Revenues of $29.2 billion, 3% higher than the year ago period. This could be attributed to a 17% y-o-y jump in Corporate & Investment Banking segment driven by higher sales & trading and investment banking revenues. However, the above growth was partially offset by a 8% decline in Consumer & Community Banking segment.
Due to widespread panic and lockdowns in recent months, there is a drop in consumer demand as people are refraining from discretionary expenditures. Further, the economic slowdown can cause serious losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for the bank, as it has a substantial loan portfolio of consumer and commercial loans. JPMorgan has significantly increased its provisions for credit losses in 2020 to cater to the loan default risk.
The bank has benefitted from its significance presence in Sales & Trading business. Further, Investment banking revenues have increased in the year due to higher equity underwriting and debt origination deals. This has overshadowed the negative growth in other segments.
While the company's results for Q2 and Q4 saw an increase in revenues, Q3 revenue were slightly lower than the year-ago period. Overall, the bank reported a 4% y-o-y increase in full year 2020 and is expected to follow the same trend in Q1 2021.
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:
JPMorgan Chase is a diversified financial services institution with operations spread across 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 customers in the U.S. and many of the world’s most prominent corporate, institutional, and government clients across the globe.
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.
JPMorgan's investment banking division - and the Sales & Trading unit in particular - has historically had strong operating margins compared to other divisions in the firm. The bank's position as the largest player in the global FICC trading industry has also helped it achieve considerable economies of scale compared to competitors.
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. Stricter regulation has affected the banking industry in several ways:
JPMorgan has a strong liquidity and capital position across its businesses. The average loans-to-deposit ratio for the country's five biggest commercial banks was 72% at the end of 2018. JPMorgan's loans-to-deposit ratio was the lowest among these banks at 65%, indicating its strong liquidity position. Its Tier 1 Capital Ratio (fully-loaded Basel 3) is over 12% now compared to 8.4% in 2007. This strong liquidity and capital position will enable the company to meet its short-term and long-term obligations without facing any difficulty
JPMorgan Chase has done well over recent years to reduce non-interest expenses as a percentage of its revenues from around 65% over 2011-15 to just 58% in 2016-18. Although an improving interest rate environment has partially contributed to this trend, the bank has also worked hard to cut down on overhead costs to improve its profit margins.
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.
JPMorgan competes with Bank of America and Wells Fargo, mostly in the retail banking business. It currently has more than 5,000 branches across the country.
JPMorgan holds a strong position in the global investment banking space. For each of the last four years, it earned the most global advisory, debt origination, and equity & equity-related underwriting fees, according to Thomson Reuters.
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 the 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 less than 4,700 now.