JPMorgan (JPM) has been a solid performer in 2012, leading its financial peers. The stock has been on a tear thus far in 2012, posting an approximate 30% price gain year to date. The S&P 500, by comparison, has risen 10.6% year to date and 11.4% with dividends.
While JPMorgan has risen significantly, it sits atop a dominant position for the rest of 2012 and into 2013.
Passing the Stress Tests
CEOs of the nation's largest banks met on Wednesday to discuss with Fed Governor Daniel Turello the implications of the Fed's new stress testing policy. Prominent among the banking titans was Jamie Dimon, JPMorgan's CEO, along with Lloyd Blankfein of Goldman Sachs (GS), Richard Davis of US Bancorp (USB), James Gorman of Morgan Stanley (MS), Brian Moynihan of Bank of America (BAC), and James Hooley of State Street (STT).
The Fed announced that the nation's largest banks would undergo stress tests to certify the banks' liquidity and solvency in case of dire circumstances. The Fed created the stress tests to simulate how banks with more than $50 billion in assets would respond to dire circumstances, similar to those of 2008. In essence, the Fed's aim is to reduce counter-party risk by measuring different banks' exposure to one another.
Though far more is to come from the stress tests, JPMorgan was the first to pass the tests, and was approved in March to raise its quarterly dividend 20% to $.30 and to begin a $15 billion share repurchase program.
Overall, the company is poised to succeed.
Positioned for Success
While there are still major headwinds in the U.S. economy as well as in the eurozone, banks have responded by raising lending standards and hoarding cash. In these areas, JPMorgan has excelled.
In 2009, when banks were still reeling, JPMorgan impressed by boasting a loan to deposit ratio of 75%, compared to 110% for its peers. In Q4 of 2011, the firm raised its Tier 1 capital ratio, the ratio of core equity to risk-weighted assets, to 12.3%. To be classified as well-capitalized, banks must have a Tier 1 capital ratio of 6%, and any dividends or distributions must not affect its capital ratio.
JPMorgan is also adept at cost-saving synergies. When making acquisitions, the firm has consolidated data centers and operating platforms in order to boost efficiencies. While the company is still reaping the benefits of these synergies from its merger with Bank One in 2004, it has proved exceptional in using these cost-savings to grow its business lines, most notably with its acquisitions of Bear Stearns and Washington Mutual in 2008.
JPMorgan is also a strong player in investment banking. In Q1 of 2012, JPMorgan's investment banking unit produced revenues of $7.32 billion and earnings of $1.38 billion, falling short of its year over year profits by 29%, but still beating the previous quarter.
According to the above Wall Street Journal article: "To boil down into Investment Banking revenues, fixed income revenue soared 87% from the fourth quarter, investment banking fees were up 23% and equity markets revenues were up 66%" since Q4 2011.
The bank is proving that the investment banking business is not dead, as many had feared, but is still producing decent returns. The 17% return on equity for the division in Q1 2012 was better than the 7% last quarter. However, though it still beat analysts' expectations, it still fell behind the previous year's 24% return on equity.
With the equity and debt markets beginning to gain steam, JPMorgan will have its hands deeply into M&A advisory, underwriting, and other services. Particularly, the firm stands to gain on an increase in IPOs. JPMorgan earned a lead advisory role, along with Morgan Stanley and Goldman Sachs, in the May 18, 2012 IPO of Facebook (FB). The Facebook IPO is one of the hottest tech IPOs since Google (GOOG) went public in 2004, and the company is expected to fetch around $100 billion when it first begins trading.
Also, JPMorgan is close to landing the financial advisory role to Research in Motion (RIMM), the Canadian phone maker. JPMorgan would stand to increase its profits and its reputation in the deal.
While the investment banking business is remaining intact, JPMorgan has also proved successful in retail banking. JPMorgan has revived its retail banking practice, and it is growing rapidly.
The unit had an impressive first quarter, becoming the most profitable line of business for the firm. The unit posted profits of $1.75 billion in the first quarter on a revenue increase of 40%. The division has completely reversed its success from one year ago when the unit recorded a loss of $399 million.
The bank has also expanded its retail branches, increasing its locations by 5%. Last year, the bank added 250 branches, and it plans to open another 100 to 150 in the future. JPMorgan is likely taking advantage of low refinancing rates by creating more mortgages, adding to the firm's mortgage fees and income.
Weathering the Storm
JPMorgan has weathered one of the worst financial crises while keeping a strong balance sheet and a continued focus on growth. It was an incredible buy in late 2011 when the stock was trading under $30. However, despite the major run-up, the company is still poised to grow even more.
JPMorgan's investment banking and retail banking units are moving closer to pre-crisis levels, and the company is spinning off excess capital to shareholders. CEO Jamie Dimon aims to distribute capital only after it has enough to grow organically.
What's more, the colossal bank continues to lead its peers. If Dimon's influence at the recent Fed meetings is any indication of the firm's future power, then JPMorgan has an incredibly bright future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.