Barron's cover story takes a bullish stance on Wall Street investment bank JPMorgan Chase (JPM) and its detail-conscious CEO Jamie Dimon. JPMorgan's 4% drop YTD looks mild compared to many of its peers, as its risk-averse management did a better job of avoiding many subprime pitfalls, and began to unwind before others. The 2004 merger of JPMorgan Chase and Bank One is nearly finished, leading to about $3 billion in cost savings due largely to massive technology streamlining. Its 3.4% dividend yield, while low for the sector, is respected because investors see management plowing cash back into the business. JPM's core financial strength, as measured by its Tier 1 capital ratio, is 8.4% vs. Citigroup's (C) 7.32%, while its risker Level 3 Assets are 3-4% vs. Citi's 6%.
JPM has sold most of the bank's recent subprime loans, but still holds $16.6 billion, plus another $8.3 billion of CDOs. Dimon calls the assets risky, but says he's fine with the company's overall risk exposure. He doesn't want to close subprime operations completely, saying "now's the time" to build a better foundation. Assets under management leaped 24% to $1.2T over the past year, and the company's asset-management revenue has grown at an even higher rate due to its success with alternative investments, which carry higher fees.
With just 7% of all U.S. deposits (10% is the regulated limit), Chase could potentially expand its retail arm by acquiring Washington Mutual (WM) or SunTrust (STI). Another underappreciated growth area is global revenue, which now accounts for only 13% of its total, but it will be a major global force within two years, according to one hedge fund manager. JPMorgan is also number-four on the global M&A front. Once the sector starts moving, Barron's says, JPMorgan is ready to take the pole position.
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