JPMorgan Chase & Co. (JPM) is the second largest bank in the United States, with assets over $2.3T. The bank has a high degree of geographical diversification, with operations in over 60 countries. JPM maintains leading positions in investment banking, retail and commercial banking, financial transaction processing, asset management and private equity.
Negative publicity due to the "London Whale" loss and investor sentiments towards the banking sector has depressed prices. However, as the economic outlook steadily improves and investor confidence is regained due to stringent regulations from the Fed, JPM definitely deserves a second look. CEO Jamie Dimon recently purchased shares worth $17M using his own personal funds, demonstrating his confidence in the bank, which is a big positive for investor confidence in JPM.
The following points outline why taking a long position in JPM makes sense,
JPM maintains a Tier 1 Capital ratio of 12.3% and an estimated Basel III Tier 1 ratio of 7.9% (Federal requirement is 7%). JPM increased its annual dividend to $1.20 (Yield: 3.15%), the second increase since the financial crisis. The bank maintains a strong capital generation capability demonstrated by an ROE of 10.4%. JPM was one of the few banks that cleared the US Federal Stress-Test which tested banks under a hypothetical severe economic crash.
2. Stringent Risk Management
JPM is well-known for being one of the pioneers in financial risk management and the bank continues to emphasize risk management in its operations. The bank's Value at risk (VAR) reduced significantly in 2011 and stands at $58MM, down 13% compared to 2010. JPM reduced its GIIPS exposure of $13BN, which is not alarming considering the bank's capital strength and earnings. The recent 'London Whale' trading loss not only resulted in a management shakeup, but also forced the bank to implement even more rigorous risk management processes and submit to greater oversight from the Fed.
3. Shrinking CDS Spreads
CDS spreads for JPM are shrinking and have consistently been lower in comparison to its peers, indicating an improving investor sentiment towards JPMorgan.
4. Strong Agency Ratings
- Moody's: Aa3
- S&P: A
Both agencies state that they see little reason for the ratings to go down further, suggesting sustainable earning and profitability.
5. Impressive Management Team
JPM has developed a strong brand value due to its management team. This has translated to the bank retaining top positions in different banking segments.
6. High Systemic Importance
JPM is recognised as a Globally Systemically Important Financial Institutions by the US Government, indicating a high probability of support in the unlikely case of default. In other words, JPM is "too big to fail."
7. Analyst Recommendations of 'Outperform'
The consensus recommendation of the 33 analysts covering the stock is "Outperform." This is an upward trend from the previous rating of "Hold."
Analyst Recommendation Breakdown:
- Outperform: 12
- Buy: 11
- Hold: 8
- Sell: 2
The stock is currently trading above the 20-Day, 50-Day and the 100-Day SMA which signals an uptrend in the stock price. The RSI indicator lies within the acceptable overbought-oversold limits, suggesting that the price isn't driven by excessive buy or sell. As seen in the Chaikins Volatility chart, the stock price bottomed on June 4, and is now on a downtrend (below zero) indicating an upward momentum. The stock recently crossed the 37.50 resistance line indicating a probability the stock may rally.
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Resistance and Support
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Taking into consideration the points discussed above and the conclusions drawn from technical analysis, it seems to be a good time to enter a long position.
Disclosure: I am long JPM.