J.P. Morgan: Big Is Not So Bad

6/1/2015


  Recent Price
$66
  Dividend
$1.76
  Yield
2.6%
  P/E Ratio
12
  Shares (millions)
3,758
  52-Week Price Range
$67.19 - $54.26

In recent years, J.P. Morgan Chase ($66; JPM) has perhaps been best known as the sprawling bank with massive legal woes.

The huge bank (third among S&P 500 Index financials with a stock-market value near $250 billion) is still paying off fines from lawsuits. J.P. Morgan's March-quarter legal costs amounted to $487 million, or $0.13 per share. In May, J.P. Morgan was one of five banks to plead guilty to criminal charges of manipulating prices in the foreign-exchange market and agreed to pay a $550 million fine. The bank has paid legal fines in excess of $26 billion over the past three years.

But not all big things are bad. Among the largest U.S. banks, only Wells Fargo ($56; WFC) offers a fatter dividend yield than J.P. Morgan's 2.6%. None can top J.P. Morgan's five-year dividend-growth rate of 51%. More important, J.P. Morgan is moving beyond its legal troubles. At the end of March, the bank lowered the high end of potential legal losses in excess of its reserve to $5.5 billion, down from $5.8 billion at the end of 2014. It expects legal costs to "normalize" in 2016.

Equally important, the bank enjoys operating momentum and seems well-positioned to profit from any rise in interest rates. J.P. Morgan is a Buy and a Long-Term Buy.

Firing on all cylinders

The bank generated broad growth in the March quarter, with all four units delivering higher revenue and net income.

The corporate and investment bank (36% of 12-month sales, 34% of net income) drove J.P. Morgan's March-quarter growth, with revenue up 8% and net income up 19%. The investment bank took a leading 9% global share of fees in the quarter, up from 8% in the year-ago quarter. The unit's trading activities benefited from increased activity in fixed-income and stock markets.

The consumer and community banking unit (45%, 44%) saw mortgage originations surge 45%, contributing to 37% higher mortgage fees. Stronger home loans, coupled with lower expenses, helped alleviate margin pressure caused by low interest rates. The segment grew net income 12% in the quarter despite sluggish revenue growth of 2%.

Commercial banking (7%, 12%) net income increased 1% as higher loan balances narrowly offset tighter spreads on loans. J.P. Morgan also increased its provision for credit losses to $61 million from $5 million in the prior year, mostly due to exposure to oil-and-gas companies, which represent less than 6% of its credit exposure.

The asset- and wealth-management business (12%, 10%) posted 7% higher revenue and net income growth of 11%. The unit received $16 billion in net long-term inflows, marking its 24th straight quarter of growth.

Conclusion

Profit estimates are trending higher, and J.P. Morgan is projected to grow per-share profits 10% this year, exceeding the average of 6% for the S&P 500's diversified banks. Shares trade at just 11 times estimated earnings, versus its industry average of 13.

An annual report for JPMorgan Chase & Co. is available at 270 Park Ave., New York, NY 10017; (212) 270-6000, www.jpmorgan.com.

J.P. MORGAN CHASE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
1.45
vs.
1.28
3%
62.96
-
54.27
12 - 10
Dec '14
1.19
vs.
1.30
-2%
63.49
-
54.26
12 - 10
Sep '14
1.36
vs.
1.42
3%
61.85
-
54.96
11 - 10
Jun '14
1.46
vs.
1.60
-4%
61.29
-
52.97
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
102.10
5.29
1.56
63.49
-
52.97
12 - 10
2013
105.79
4.35
1.36
58.55
-
44.20
13 - 10
2012
107.08
5.20
1.15
46.49
-
30.83
9 - 6
2011
110.84
4.48
0.80
48.36
-
27.85
11 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
91
71
84
64
68
61
77

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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