For the most part, the environment has been bad for major U.S. banks. With onerous regulations and slow economic growth, investors have been heavy sellers. So, there was little optimism ahead of JPMorgan Chase’s (NYSE:JPM) earnings report.
But interestingly enough, it was far from bad. JPMorgan was able to post a nice 7% increase in revenue and its profit came to $5.43 billion.
On the news, the stock rose nearly 2%. However, it’s still down 3.6% for the year.
Does JPMorgan represent a good value for investors? Let’s take a look at the pros and cons:
Pros
Leadership. JPMorgan CEO Jamie Dimon is perhaps the world’s most savvy banker. Because of his focus on creating a “fortress balance sheet,” he was able to deal effectively with the financial crisis of 2008. In fact, he capitalized on the situation with smart acquisitions, such as Bear Stearns and Washington Mutual.
Moreover, JPMorgan should have little problem dealing the higher capital requirements. Keep in mind that the firm was the first to payback its federal bailout loans.
Investment banking. This segment has been growing nicely, both with debt and equity offerings. Interestingly enough, there could be a nice pop from public offerings. JPMorgan has been effective in snagging some juicy assignments.
Credit quality. This continues to improve, in terms of lower amounts of nonperforming assets and fewer charge-offs. This is the case for both consumers as well as business customers. In other words, this trend should lead to better profitability in the coming quarters.
Cons
Loan growth. This is still tepid. In the latest quarter, there was a 1% decline. While things should improve, it will likely continue to be at a sluggish rate.
However, there could be a big problem if the U.S. economy slows down. With the budget impasse on Capitol Hill and the problems in Europe, the risks are certainly increasing.
Mortgages. While this business isn’t as bad as other banks – like Bank of America (NYSE:BAC) – the exposure is still a big drag. JPMorgan continues to take charges for losses and litigation fees. There is also uncertainty about the overall exposure to possible mortgage putbacks.
Regulations. The U.S. government has certainly taken harsh actions on the banks, as seen with the Dodd–Frank legislation. There are new restrictions on areas like overdraft and interchange fees. As a result, it will be tougher for banks to increase revenue.
Verdict
While there are some major headwinds, the fact is that JPMorgan is in a solid position. Its capital is strong and the firm has a set of diverse businesses.
Even though banking is still in a funk, this will eventually change, and JPMorgan is likely to be a top pick for investors. In fact, the shares are fairly cheap, coming to about 9 times earnings. What’s more, it looks like there may be increases in the dividend rate.
Thus, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.
