JPMorgan Chase & Co.: A fintech challenger

JPMorgan Chase & Co. (JPM) is an American multinational investment bank and holding company. It is the largest bank in the United States and the Seventh largest bank in the world by total assets around $3.213 trillion. JPM is also the world’s most valuable bank by market capitalisation at $411.15 billion.

Contents

  • History of JPMorgan Chase & Co.
  • Latest financial statement
  • 2008 financial crisis
  • Fundamentals
  • Outlook for the future

History of JPMorgan Chase & Co.

The bank of JPMorgan Chase & Co. can trace its roots all the way back to 1799 in New York City. The firm is built on the foundation of more than 1,200 predecessor intuitions that overtime have been taken over or merged to form the modern-day bank. The Manhattan Company is JPMorgan Chae’s earliest predecessor institution which was chartered by the New York state legislatures to supply “pure and wholesome” drinking water to the city’s growing population. The Manhattan Company’s founders include famous individuals such as Alexander Hamilton and Aaron Burr. Its charter allowed the Manhattan Company to use its surplus capital for banking operations.

Drexel, Morgan & Co. was founded in 1871 when J. Pierpont Morgan partnered with Philadelphia banker Anthony Drexel. Pierpont build his reputation as a leader in railroad investments, which was the largest and most dynamic industry in the years following the Civil War. The firm was rechristened J.P. Morgan & Co. in 1895 with Pierpont at the head. The Chase national Bank was founded not long after by John Thompson in 1877. The Drexel, Morgan & Co. building at 23 Wall Street was the first office building in New York City to be powered by the Edison Electric Illuminating Company in 1882.

Following the Panic of 1893, US Treasury gold reserves were being drained causing a crisis in the nation’s currency, banking and international trade. At this time there was no central bank so private banking had to step in lead by J. Pierpont Morgan, who organised the private sale of government bonds to European buyers to replenish gold supplies and restore public confidence. Morgan would again take charge during the 1907 Crisis where the stock market collapsed, credit dried up and banks and brokerages fell. Morgan convinced the major New York banks to supply $30 million in liquidity to the markets in the form of New York City bonds. This crisis showed the need for a central bank and leads to the creation of the Federal Reserve System in 1913.

J.P. Morgan & Co was listed as a public company in 1940 and merged with Chase Manhattan in 2000 to form J.P. Morgan Chase & Co.

The 2008 Financial Crisis

The Financial Crisis of 2008 brought the global economy to the brink of disaster, with the bankruptcy of Lehman Brothers considered the key moment. During 2008 the US housing market collapsed and J.P. Morgan acquired Bear Stearns and Washington Memorial at the request of the Federal Reserve as they too faced collapse.

How the bank acted in 2008 is best described by its CEO Jamie Dimon:

We took other extraordinary actions — often at calculated, but great risk to JPMorgan Chase — to support clients, including governments, and to support the markets in general. We loaned $70 billion in the global interbank market when it was needed the most. With markets in complete turmoil, we were the only bank willing to single-handedly lend $4 billion to the State of California, $2 billion to the State of New Jersey and $1 billion to the State of Illinois. Additionally — and frequently — we loaned or raised for our clients $1.3 trillion at consistent and fair rates, in many cases far below what the market would have demanded, and we provided more than $100 billion to local governments, municipalities, schools, hospitals and not-for-profits over the course of 2009. Many other banks did the same. You probably will be surprised to find out that we lent a tremendous amount of money to Lehman before the crisis — and even more after the crisis. In fact, at the request of the Federal Reserve, we took extraordinary risk to lend more than $80 billion (on a secured basis) to Lehman after its bankruptcy to help facilitate sales of assets in as orderly a way as possible to minimize disruption in the markets.

Latest Financial Results

JPMorgan posted income of $30.2 billion in the 4th quarter of 2020 and a total revenue of $122.9 billion for the 2020 financial year. JPM’s 2020 revenue was up by $4.5 billion from $118.5 billion in 2019. This is extraordinary growth in revenue considering the pandemic that has dominated the economy.

These great earning results have prompted many analysists to upgrade their share price targets. Credit Suisse have rated JPM a ‘buy’ with a target of $150 per share with Royal Bank of Canada saying the same. Barclays have said that the share price could go as high as $172. All of this due to JPM’s per-share earnings of $3.79 being significantly higher than the average analyst estimate. This was aided enormously by a 34% YoY growth in investment banking and an abundance cheap funding increasing average deposits by 35%.

Fundamentals

JPM has a current market capitalisation of $411.15 billion and Earnings Per Share (EPS) of $7.65, giving a Price to Earnings (P/E) ratio of 17.62. When compared to Bank of America (P/E of 15.73) JPM is trading at a slight premium, but is far better than Wells Fargo (P/E of 86.49). The JPM share price has more or less recovered from its February high of $138 with it reaching a new high of $141.17 in January before dropping back into the £130s.

JPM does pay a quarterly dividend currently at $3.60 per share annually giving a healthy yield of 2.67%, and a pay out ratio of 47%. The bank recently announced a share buyback program worth $4.5 billion in the first quarter of 2021 which is expected to give a further boost to the share price.

Outlook for the Future

I personally see JPM being a solid holding for a long time to come. Although they do face challenges, the pandemic has shown a level of resilience in an industry that is very cyclical. One major challenge JPM faces is its massive balance sheet which is growing too fast. While this might not seem a big problem, for the bank and also regulators it presents a headache. Non-interest-bearing deposits grew by 41% in 2020, while interest-bearing deposits grew by 32%. The non-interest-bearing deposits are the best kind of deposit for a bank because they don’t cost anything.

The problem is that regulators require banks to retain a certain amount of capital so they can absorb unexpected loan losses in bad times, JPM’s growing balance sheet has begun to put stress on its supplementary leverage ratio (SLR). This is the bank’s capital compared to its total leverage exposure. JPM must maintain an SLR of 5% which currently stands at 5.8%. In order for JPM to resolve this they have three options: turn away deposits, issue more shares or retain more equity. The last of these is by far the most preferred but may impact dividend growth.

JPM also faces challenges from new ‘Fintech’, the CEO Jamie Dimon even came out and said that banks should be “scared sh**less” about the challenge offered by fintech firms. The bank faces competition from companies such as PayPal, Squire, Strip, Apple etc. Dimon is under no illusions saying, “I expect it to be a very tough, brutal competition over the next 10 years”. He also said that JMP is looking into acquisitions and is open to making a purchase in the payments industry, Dimon ended saying, “I expect to win, so help me God”.

I do hold shares of JPM as part of my stocks portfolio, and it is company that I expect to see sustained growth in over time. I plan to continue to add to this position on a cost average basis and reinvest all dividends.

None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

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