Following $2 billion in losses related to the trading activities of the "London Whale," and declines in the recent market pullback, JPMorgan Chase (JPM) stock at its current price of about $34 seems to present an attractive opportunity for investors. This price represents about a 30% discount to JPM's approximately $47 book value.
The bank's disclosure of its trading losses on May 10, when the stock closed at $40.74, helped chip $25 billion from its market value, and its stock price dropped about 10% in one day to close at $36.96 on May 11. The stock last saw this sort of steep overnight dip in its price during the volatile times of late 2008 and early 2009, when economic turmoil was greater and even the "D" word was being tossed around as the fallout from the financial crisis was more unclear. At its current price, the stock is further beaten down about 16.5% from its May 10 level.
While JPMorgan Chase asserts that the bank was merely trying to hedge its exposure to risk and not trading and making bets in order to generate additional profits, the bank's losses revealed a chink in its armor and have led to calls for additional bank oversight relating to the use of derivatives.
Only two of 15 analysts who weighed in on this development immediately following the announcement have downgraded their ratings of the stock.
The setback comes about just as the bank was nicely recovering from the aftermath of the financial crisis and had earlier this year raised its annual divided to $1.20 per share, making for a 3.5% yield at the current price, and initiated a $15 billion stock buyback program. The bank has stopped its repurchase activities for the moment following the disclosure of its trading loss.
For the first quarter, the bank reported revenues of $27.4 billion, up 6% from the 2011 first quarter. Net income was at $5.4 billion, down 3% from $5.6 billion in the first quarter of 2011.
Thanks to an improving economy, consumer delinquency trends are improving too, which means that the firm had to set aside less money in the first quarter to deal with credit losses. The firm's provision for credit losses was at $726 million, a decline of 38% from the first quarter of 2011. The improvement in the economic environment also bodes well for JPMorgan Chase's lending activity going forward.
The bank also saw a positive impact of $1.1 billion from a finalization of Washington Mutual's bankruptcy settlement. JPMorgan Chase acquired WaMu, a major subprime lender that ran into trouble after the housing market started going downhill, in 2008.
It seems there is no end in sight to the fallout from the litigation arising from the housing market downturn, and JPMorgan Chase had to set aside $2.5 billion as reserves to deal with litigation on mortgage-related matters. And another $0.9 billion negative impact came from the tightening of credit spreads.
Capital markets activity seems to have cooled off a bit this year compared to last year's first quarter levels, which resulted in the bank's investment banking fees seeing a drop off of 23%.
After weathering the financial crisis better than its competitors, the bank has identified some areas for growth. For one, it has stepped up its lending activity to small businesses by 35% in the first quarter. For 2011, its lending in this area was at $17 billion, up 52% over the 2010 period.
Globally, JPM would like to expand its wholesale businesses that cater to businesses rather than individuals, providing asset management, investment banking, treasury and securities services. Emerging markets and expanding markets in Asia, Africa and the Middle East provide scope for growth in this area. JPMorgan Chase expects that as its clients, such as multinational corporations and sovereign wealth funds, expand globally they are also more likely to use JPMorgan's services internationally.
The bank also sees opportunities to grow its commercial banking business, which it added to with the WaMu acquisition. And there's no let down in growth in JPMorgan's banking activities on the consumer side either, with the bank adding 260 branches in 2011. Considering that consumers still require a personal touch, for the next five years the bank expects to add up to 200 branches a year.
Another area JPMorgan sees potential is in branches catering to wealthy individuals, planning to open up 750 of these in 2012, from 250 in 2011.
As for its financials, JPMorgan enjoys an operating margin of about 35%, which compares favorably with the industry average of about 33%. Its earnings per share of $4.50 for the trailing twelve month period is also considerably superior to the banking industry average of 1.96, with Bank of America (BAC) showing a loss per share of $0.13, and Citigroup's (C) EPS at $3.59. The firm's price-to-earnings ratio of 7.3 also is better than the industry average of 9.39. On a forward basis, the firm's PE ratio is even better, at 6.15.
While JPMorgan looks like a good bet, it still faces ongoing litigation risk from the fallout of its activities related to mortgage lending, underwriting and issuance of mortgage securities. The bank might also have to repurchase mortgages sold to Fannie Mae and Freddie Mac.
As well, it is not clear how much more exposure the firm has to losses based on the London Whale's activities, as well as other derivatives exposures. Regulators are investigating the adequacy of the firm's risk oversight activities. There could also be further fallout from the ongoing European sovereign debt crisis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
