JP Morgan: Will the Strong Performance Continue?
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JP Morgan (NYSE: JPM) is the second largest bank in terms of assets under management of $2.1 trillion, and a market capitalization $163 billion. JP Morgan’s stock price is around $43, and its price to earnings ratio is 9.65. The stock has traded in a 52 week range between $27.85 and $46.49.
In mid-April, JP Morgan reported earnings for the first quarter of 2012. The company’s reported earnings of $1.31 per share easily beat projected earnings of $1.16 per share. Once again JP Morgan was able to increase its earnings per share which were 45% high than the fourth quarter of 2011.
First quarter revenues were $27.4 billion and net income was $5.38 billion. The revenue figure of $27.4 billion was 12% higher than the prior quarter. This was good news because there have been questions about whether large banks would be able to maintain their revenue flow after recent changes in federal banking regulations. On October 1st federal regulations went into place that will limit the fees that banks can charge when consumers use debit cards. These new regulations, which are called the Durbin amendments, could cost banks as much as $6.6 billion in revenue a year, beginning in 2012, according to Javelin Strategy and Research. Another federal regulation which limits overdraft fees went into effect in July of 2010 and could cost banks $5.6 billion in revenues per year.
JP Morgan however was able to minimize the effect of the new revenue sapping federal regulations. “The positive results were driven by its retail and banking division, where sales jumped 40%.” JP Morgan announced that “lower rates encouraged customers to refinancing their home loans, and that it benefited as well from the government's Home Affordable Refinance Program. In credit cards, sales were up and the company wrote off fewer loans.”
JP Morgan also benefited from reduced credit card charge offs as customers have been better at paying their credit cards. “Improving household finances were good for JPMorgan's credit card business, which swung to a $1.343-billion profit in the latest quarter from a $303-million loss a year earlier.” Lower interest rates helped the company earn hundreds of millions of dollars of excess profits in its mortgage division. The company’s first quarter bad debt loan provision was reduced to $726 million compared to $2.18 billion in the fourth quarter and $1.17 billion in the first quarter of 2011.
Positive News
JP Morgan noted several positive developments that could boost future earnings. The company’s “investment banking arm bounced back in the first few months of the year, turning in a profit of $1.68 billion, down 29% from a year earlier but more than double what it booked in the fourth quarter.” The investment banking division generated a larger profit than any division in the company. In addition to the gains in the investment banking division, the bank’s deposits were up for both consumers and businesses by a total of 8%.
In mid-March when JP Morgan announced that it had passed the Federal Reserve’s stress test its stock rallied by 7%. As a result of passing the stress test the bank will increase its quarterly dividend by 20% from $0.25 to 0.30. In addition, the bank authorized $15 billion for stock buybacks.
Negative News
In the first quarter the bank allocated $2.2 billion towards future litigation expenses. Jamie Dimon said that the company's mortgage business expects to see “elevated levels of costs and losses” for a “while longer.”
Stock Performance
JP Morgan stock has been moving higher as have all of its competitors. The reason for the higher stock prices is because of an improving economy and higher profits. A snapshot of the stock performance of the major banks shows that since January 1st JP Morgan’s stock price is up by 25%, while Bank of America’s stock price is up by 43% and Goldman Sachs stock price is up by 21%.
Conclusion
I think that JP Morgan’s stock price will benefit from a number of trends. The US economy is improving, and that should boost the profits of all of the major banks. With the exception of Wells Fargo, JP Morgan’s businesses are stronger than any of its competitors which explains why its stock trades at a premium to its competitors. Jamie Dimon, CEO of JP Morgan, said “corporations have cash and housing is getting very close to the bottom.” If Mr. Dimon is correct, and I believe he is, then JP Morgan’s earnings will continue to increase and the stock price will move higher.
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