J PMorgan Chase (JPM) is the largest money center bank in the United States. It controls $2.39 trillion in assets which places it just ahead of Bank of America (BAC), which controls assets of $2.17 trillion. Chase has a market cap of $197 billion, and its stock price is around $52.
JPMorgan, like most other U.S. banks, saw earnings slump during the financial crisis of 2008 and 2009. However, due to the strong leadership of its board of directors and its CEO Jamie Dimon, the bank's income never dipped into the red. Chase maintained disciplined mortgage lending standards, thus avoiding the red ink that banks like Bank of America and Citigroup (C) had to endure. The type of discipline that guided Chase through the sub-prime mortgage crisis is why Chase is the largest bank in the world right now, and why I think that it is best of breed.
In the second quarter, Chase reported impressive increases in both revenues and earnings. The bank reported revenues of $26 billion, up $13.5% from the second quarter of 2012. Net income was $6.5 billion, up 30% from the prior year. The earnings per share came in at $1.60 blowing out analysts' estimates of $1.44. Perhaps investors were not that surprised that Chase beat analysts' estimates because it was the sixth consecutive quarter in which the bank earnings had topped estimates. On the day after the announcement, the bank's stock price fell about 1% on heavier-than-normal volume. While some investors might think that is a bad sign I do not. I think that the drop in price just points out how confident investors were in the bank's ability to generate better-than-expected earnings.
The biggest reasons for Chase's earnings growth was the performance of their investment banking unit. The earnings of the investment banking unit rose by 38% to $1.7 billion. A second key reason that the bank's earnings increased was that its bad debt charge-offs declined from $2.3 billion in the second quarter of 2012 to $1.5 billion. The strong credit quality that the bank requires from loan applicants is the reason for the decrease.
The Future for JPMorgan Chase
Predicting the future for Chase is difficult. There are several variables that could have a major impact on the company's future earnings. The main variable is the rising interest rate. The rising interest rates have slowed the bank's earnings from mortgage originations and mortgage refinancing. In the second quarter earnings from the bank's mortgage originations were $49 billion, which was an increase of 12% from the second quarter of 2012, but which was 7% lower than the prior quarter. However earnings from mortgage refinancing fell, and the bank's overall profit from mortgage banking dropped by 14% to $1.1 billion. The reason for the dip in mortgage loan earnings was the increased interest rates. Since the Fed signaled that it might ease its stimulus efforts, interest rates for a 30-year fixed mortgage have risen from a low of 3.54% to over 4.75%. The bank's CFO Marianne Lake cautioned that the volume of mortgage refinancing could fall by an "estimated 30 percent to 40 percent" in the second half of the year.
Jamie Dimon gave a mixed message about the bank's future, he said "the most recent changes in the economy," especially the combination of higher mortgage rates and higher consumer and business confidence, is a mixed bag for JPMorgan. The higher rates will increase market volatility and should help its trading businesses," even as the bank said mortgage originations could fall 30%."
The higher interest rates will not only increase Chase's trading business, it will boost the bank's overall lending business. In the second quarter, the bank's net interest margin [NIM] (the spread between the interest that the bank charges on loans and the interest it pays to lenders and depositors) was 2.20%, this was down from 2.43% in the second quarter of 2012. As interest rates move higher, the bank will be able to increase the interest it charges on loans, thus increasing its NIM.
Chase has benefited from a decrease in its loan losses. In the second quarter the bank's losses from its real estate portfolio fell by 50% and its credit card losses were near all-time lows. The bank will also benefit from higher NIMs as interest rates move higher. Higher interest rates will also increase stock market volatility and drive up the bank's trading business.
In the second quarter, Chase's loan growth was down. As a result of rising interest rates, the bank's mortgage banking income was $1.1 billion down 14% on a year-over-year basis. The bank's profit from commercial banking was down 8%. Also, the bank's NIM was near historic lows at just 2.20%.
The future looks good for Chase. It seems almost certain that the economy will continue to grow, and that interest rates will continue to rise. These two factors will help the bank to increase both revenue and net income.
Chase's stock price is up by 18% since the beginning of the year. While that rate of stock growth is very respectable it is slower than the other large money center banks. For instance Bank of America's stock price is up 21%, Wells Fargo's (WFC) stock price is up 23%, and Citigroup's stock price is up 20% since the beginning of the year. Despite the fact that Chase's stock has not performed as well as its competitors I think that it is the most attractive. Chase's earnings have been the most stable of the large money center banks. Also, its valuations (price-to-earnings ratio 8.6 and price to book ratio 0.99) are very attractive. In addition after the second quarter its dividend was increased by 26% to $1.52 per share, and it now its yield is 2.9%, which is the highest of any of the large money center banks.
I think that Chase investors will benefit from its increasing stock price and growing dividend.