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JPMorgan Chase & Co (JPM)

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Top Drivers for Period
Key Drivers

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 FICC Trading Securities: JPMorgan's FICC trading yield recovered from less than 0.5% in 2008 at the peak of the global economic crisis to 6.3% in 2013. The volatile nature of the FICC trading business has resulted in the figure fluctuating between as high as 5.65% in 2016 and 3.83% in 2018. While we estimate yield figures to normalize around 4% in the long run, should the division perform worse than expected in coming years, the yield could decrease to below 3% over the Trefis forecast period. If that were to occur, there would a downside of roughly 5% to the Trefis price estimate.
  • Investment Banking Operating Margins: JPMorgan's investment banking business normally reports margins around 36%, but a jump in revenues coupled with cost discipline helped this figure average 43% over 2016-18. We expect margins to remain at this level in the years to come. However, if these margins return to 35% for our forecast period then there would be a downside of 8% to the current price estimate.

BUSINESS SUMMARY

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 customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients across the globe.

SOURCES OF VALUE

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.

Investment banking operations have higher margins compared to other divisions

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.

KEY TRENDS

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. Stricter regulation has affected the banking industry in several ways:

  • Banks are now required to hold additional amounts of capital which can potentially slow growth
  • The CARD Act passed by the Congress has clipped card 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 has forced banks to scale back trading operations
  • Securitization has become less appealing, as investors and regulators 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 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

Improvements in efficiency

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 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.

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 5,000 branches across the country.

Dominant position in investment banking

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.

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 less than 4,700 now.

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