JP Morgan Chase (NYSE:JPM) has a rich history that dates through the 19th century. It was the main source of funding that was needed for the American railroad system, and also for consolidating Andrew Carnegie’s assets and other steel companies into U.S. Steel. After the Panic of 1893, it was able to arrange a purchase of $62 billion worth of gold from Europe to shore up the US Treasury, and in the midst of the Panic of 1907 J.P. Morgan himself called the major financiers to come together to plan the financing which prevented the demise of the country’s money system. This is the story of a bank for merchants, following similar to such historic financiers like the Medici and the Fuggers and even the Rothschilds.
The present-day JP Morgan is the closest thing to a bank like this still existing in the world. As its CEO Jamie Dimon, who has managed JP Morgan Chase since 2005 and is the closest person to merchant banks of old. Under his direction JPM has surpassed larger foreign banks and established dominance as the most prestigious bank in the world. Dimon has been compared to Warren Buffett as one of the two most well-known business leaders of today. And his annual shareholder letters compete with Buffett’s for popularity and the hope that they’ll provide valuable information for investors. Running JPM which is an important company with business operations across the globe is like operating an empire. As like Buffett, his position provides daily reports from its many departments, which allows him to keep his eye on the pulse of business developments.
Understanding the context of this is an essential first step in understanding the potential JPM stock forecast 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 differentiate between “mass wealthy” and affluent in reporting results. None other U.S. bank comes close in terms of balance or the relative importance of all the different categories. Although four Chinese banks, and the one Japanese bank are bigger by some measures, (JPMorgan is the 6th most influential bank globally), JPM is by far the most influential bank on the planet. It is one of the top ten stocks in terms of market cap within the Vanguard S&P 500 Index ETF (VOO) and ranks #2 for the Vanguard S&P Value Index ETF (VOOV) and in both instances it is just in front of Berkshire Hathaway (BRK.A)(BRK.B).
Its place as the top-ranked merchant bank begs the question of its performance this year. Stock investors in banks may be puzzled by the truth there is a reason that JP Morgan, the bluest of blue chip banks, is cheaper than the second highest ranked bank, Bank of America (BAC). In terms of P/E ratio (P/E) which is a measure of profitability, the P/E of BAC is 27.5 percentage higher than the P/E of JPM (13.86 against 11.05). JPM is thus cheaper by that whopping margin. Do you think that’s a good thing? The answer lies in the market’s assessment of the economy. Since it is a bank heavily geared to consumer banking, Bank of America should profit more from higher interest rates and an ebullient economy. JP Morgan’s stock is being punished for its lack of an economic sensitivity as well as the rising interest rates.
There are two ways of looking at this. Short version: when the economy continues get hot, with an increase in rates of inflation JPM will do less as well as other major banks – in the current year at least. That’s not so bad. It’s a stable and extremely profitable bank that is successful in both good as well as in bad. If the economy slows down, than expected, it will shine like it did in 2008 and 2009 as numerous other financial institutions failed. In fact, JPM had to be forced to accept TARP funds by authorities at the Federal Reserve to accept TARP rescue funds in order that banks in serious trouble wouldn’t stand out. The company’s buyback policy reflects its deeply conservative nature. JP Morgan consistently buys back 2% or 3% of its shares, preferring to keep solid cash reserves whereas banks with more aggressive policies like Bank of America have committed to using approximately 100 percent of their earnings to buyback shares this year. JPM also provides a continuously rising dividend with a yield of 2.42 percent, for an overall return to shareholders likely to be 4-4.5 percentage.
The only thing that can offset the low return for shareholders could be JPM is extremely cheap with 11.05 times earnings, which is a ratio that is suitable for financials going through hard times operationally, something JPM isn’t. The majority of investors in banks today are unaware of how banks were historically priced. Before the crisis of 2008-2009 banks were priced at a lower discount to the P/E of the market. If they were priced in this manner today larger banks would have a P/E around 15. This leaves plenty of room for capital appreciation for JP Morgan in 2022. Safety, dividend, buybacks and capital appreciation make an excellent combination. Bank of America, its main competitor, may do better with strong growth in the economy and rising rates of interest, but it has higher risk and less room for an increase in valuation.
Breaking Out Some Operating Numbers for JPM
An excellent place to start is the breakdown of JP Morgan business sectors by their contribution to revenue. These are:
Consumer and Community Banking – 41.5 percent
Financial Services for the Corporate and Investment (C&I) – 39.9%
Asset and Wealth Management – 11.3%
Commercial Banking 7.3% 7.3%
This breakdown into the relative sector contribution to revenue tells the story that is the case with JP Morgan Chase as compared to all other large U.S. banks. Of the three sectors mentioned above only one measure explains the difference from other banks. Bank of America, Wells Fargo (WFC) as well as Citi (C) in order of size, and ranked in that order based on the size of their combined operations, are considerably more placed in Consumer and Community Banking.
This is the reason for the fact that all three other large banks are much more sensitive to economic conditions and the rise in rates. Much more of their revenue and earnings that are closely tied to the interest earned from Community and Consumer loans. In its slide presentation on the third quarter of earnings Bank of America estimated that the loan earnings would rise by $7.2 billion with a 100 basis points rise of interest rates. The expectations for JP Morgan is in the region of 10 percent less. This is despite JPM’s market cap has been about 27% higher. Imagine this in this way the sensitivity of JPM towards market prices in Consumer and Community lending is roughly the same as that of BAC and other banks with large capital however, Consumer and Community lending makes an even smaller portion of its overall business.
The Total Non-Interest Income for JP Morgan is 33% greater than its Net Interest Revenue of $51,968 while the Interest Revenue on loans at Bank of America is about the same as Non-Interest Income. This brings the picture of JP Morgan as a global institution with multiple income sources. Some are much more secure than lending. This creates JPM less sensitive to economic conditions and the general rate of interest rates.
Quant Rankings, Factor Grades and Ratings
The overall Quant Ranking of JPM is about 3.5 out of five. Within Diversified Banks it is ranked 13 out of 47, while in the Financial Industry 128 in 615. Its overall ranking is #932 out of 4173. The overall score of 932 is quite positive however it must be not forgotten that many ranking methods (Joel Greenblatt’s famed “Magic Formula” value ranking of stocks that should beat the market pops into our minds) do not include banks since their primary metrics are different from those of other companies. JPM’s high ranking could likely increase with a system that accepted the metrics of financial businesses.
The most exact of rankings that can be applied to a lot of readers on this website are JPM’s Dividend Gradings. JPM is ranked with an A- for safety, B C for Yield, and A for Consistency. I believe that’s about right. There aren’t many companies that have the security and stability of JPM. Its yield is 2.42 percent, and it has raised its dividend each year for the past nine years. It is certainly worthy of its spot on many lists of Dividend or Dividend Growth Stocks.
Many Factor Grades for the other features are confusing. The objective and indisputable one is Earnings Revisions, which receives an A. Momentum gets a C+. The reason for this is it being a JPM is the lowest beta stock. This means it is less volatile than the market on both the upside and negative side. In the last year, the market for large cap stocks jumped dramatically. JPM simply doesn’t move as much as technological stocks or speculated stocks, or those with more cyclical businesses, however, its Momentum has been quite positive, while the most exciting sectors of the market have plunged sharply. The growth numbers aren’t particularly impressive but probably deserve an upgrade over D+. And its Profitability Grade has its F rating due to not being graded on several parameters. In terms of Valuation and Profitability Grade, the D+ ranking is a head-scratcher.
How could a well-established company with growing earnings and dividends and an 11-year P/E rate earn an D+ for valuation. Ben Graham suggested that an ordinary company with zero growth deserved a P/E ratio of 15, and JPM is more than an ordinary company. One could argue that analysts as a group with no memory of the normal times before 2008, don’t fully grasp how cheap all the major banks are when measured against their long-term histories. Of the banks, it is possible to say that an all-weather lender such as JP Morgan shouldn’t trade at just a 27.5 percent discount to Bank of America even if BAC is expected to see higher growth in earnings in the coming year.
Purchasebacks, Competitors, and Risks
JP Morgan’s competitors within the handful of big banks don’t pose a significant problem. Each full-service bank does more or less the same process in roughly the same manner. Customers are extremely loyal and the nuisance of having to switch banks is a strong enough deterrent to serve as moat.. The biggest risk is the Fintech startups. Jamie Dimon has made it clear in recent annual shareholder letters that he sees these startups as the biggest challenge as well. JPM has taken significant steps to combat the threats of technology, including bitcoin. Money is the main component of banking and an institution with the size, reach, and resources of JP Morgan is well positioned to compete with the new challengers.
In his 2020 shareholder letter as well as in the conference call following the Q3 earnings report CEO Dimon has emphasized the fact that new fintech businesses are not held to the regulatory standards of actual banks. He sees this as not only a disservice to the general public, but the reason for an unfair competitive disadvantage for actual banks , which have to comply with strict regulations and incur significant costs to comply. In response to the situation However, he said that he did not expect the government to remedy this issue in the near future , and stated that JPM will remain competitive in the present environment in spite of the unfairness. In the same section, he stated that limiting buybacks to the smallest amount is a part of allocating capital for organic growth as well as tackle competitive issues. From the perspective of an investor’s view, it’s a normal business risk.
Recommendation for JPM Stock
JP Morgan Chase is an extremely stable and safe bank and an excellent investment option for 2022. A resurgence in the economy and interest rates could be ideal for banks. JPM will take part. If the economy is booming and interest rates are rising rapidly, Bank of America and some other banks could raise profits and buybacks at a greater rate, but for the long-term investor, JPM offers stability and power that give it an lower risk. Investors should decide for themselves as to the type of investment they’d like to make. I have both banks with large size as major components of my portfolio. I have more Bank of America which I purchased years ago, when it was much less expensive. I will be paying close attention to JPM’s forthcoming earnings report as well as the earnings call.
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