Big Bank With Big Growth

By Chad Henage - October 18, 2012 | Tickers: BAC, JPM, WFC | 0 Comments

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It's easy to criticize and hate big banks, but if you are an investor these big banks are likely to be good investments. If you think about how these institutions consistently performed before the Great Recession, there is no reason to believe they won't return to this type of growth in the future. The banking industry has gone through consolidation and seen banks fail; this only serves to make the business more attractive for the remaining competitors. J.P. Morgan & Chase (NYSE: JPM) is a good example of a company that has been labeled as “too big to fail”, based on recent results I would agree.

Headline Earnings:

While J.P. Morgan is a huge financial institution with multiple divisions, its somewhat complicated structure hides huge potential. In the current quarter, the company reported revenue up 6% and huge EPS growth of over 37%. The company showed good, but not spectacular loan and deposit growth of 4% each. In total deposit and loan growth, Wells Fargo (NYSE: WFC) reported similar growth with 3% loan growth, but 7% deposit growth. Just for point of comparison, in Bank of America's (NYSE: BAC) last quarter, they reported average deposits up just 2% and lending declined by double digits in most areas. In fact, every division of the company showed double digit income growth except for the Investment Bank. Let me walk you through a few of the company's more important divisions and you'll see just how well this bank is doing.

#1 Investment Bank:

J.P. Morgan competes in several businesses, but one of the largest segments of revenue and net income comes from the company's Investment Bank. While this was the largest contributor to the company's results, surprisingly this was also the company's weakest division. Revenue was down 1.44% and net income was down 3.91%. Even though these results weren't particularly strong, the company still maintained its lead in multiple investment bank ratings. The company is still number one in Global Investment Banking Fees, Global Debt, Global Equity, and Global Long-term debt.

Retail Financial Services:

If J.P. Morgan continues on its current path, the company's retail banking operations will overtake the Investment Bank as their most important division. In the current quarter, Retail Financial Services grew revenue by over 6% to about $8 billion. Net Income from this unit increased over 21% to $1.4 billion, just shy of the $1.5 billion the Investment Bank produced. What was particularly impressive was the unit's loan and deposit growth. Business banking loans increased 8% and average total deposits increased by 9%, both handily out pacing the bank's overall loan and deposit growth. Considering that competitor Wells Fargo saw over 9% growth in loans and over 7% growth in deposits in their business banking operations, you can see that large banks are targeting businesses to try and find loan and deposit growth. Even more importantly, the company's mortgage production revenue increased by 36% and mortgage loan originations jumped 29%. This lies in stark contrast to the 55% drop in first mortgage originations at competitor Bank of America in their most recent quarter. Considering that mortgage income contributed almost $1 billion in net income to the company's bottom line, these increases were the primary reason J.P. Morgan reported such strong EPS growth. In fact, without the huge jump in mortgage income, the company's overall EPS growth would have been about 10% instead of the over 37% reported increase.

Auto, Credit Cards, Commercial and Asset Management:

I won't go through each of the company's other divisions in detail, but I will say across the board the company reported good growth. In the company's Card Services & Auto division, net income increased 12% on the back of a 4% increase in auto loans and 11% higher credit card sales volume. J.P. Morgan’s credit card results were about in line with their competition as Bank of America saw credit card sales volume increase about 12% in their most recent quarter. Commercial Banking showed net income up 21% and average loan balances jumped by 16%. Treasury & Securities Services showed net income up 38% on higher deposit balances, higher securities balances, and higher trade finance loan volumes. Last but not least, Asset Management showed a 15% increase in net income with assets under management up 10% to $1.4 trillion. What was really amazing is this division showed average deposits up 15% and average loans were up 36%. The strong growth in deposits and loans shows that J.P. Morgan is leveraging its brand name into better results in their asset management business. You can really see the company's strength when compared to competitor Wells Fargo, which reported just 0.14% growth in loans and 2.55% growth in deposits for their asset management division. This proves that just being a big bank isn't enough, and J.P. Morgan is leading the way in growing relationships with high net worth individuals. Clearly from top to bottom the company is “too big to fail”.

Conclusion:

If you compare three of the biggest banks, J.P. Morgan shows a good combination of both income and expected growth. The stock sells for just under 9 times forward projections, and analysts expect earnings growth of about 7%. While analysts are calling for almost 8% growth at both Wells Fargo and Bank of America, J.P. Morgan might do better than analysts expect. The company has beaten earnings estimates in three of the last four quarters, and in the last two quarters beat estimates by at least 20%. When it comes to yield, J.P. Morgan offers the highest current income of the three with a payout of 2.9%, versus about 2.6% at Wells, and less than 1% at Bank of America. Even with the challenges the bank has run into over the last few years, J.P. Morgan appears set to capitalize on a continued recovery in the economy. With nearly every division showing a double digit increase in net income, the company could be a good choice for investors looking for exposure to the banking and investment banking industry.

Interested in Additional Analysis?

To learn more about the most-talked-about bank out there, check out the Fool’s in-depth company report on Bank of America. The report details Bank of America’s prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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