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JPMorgan's (JPM) bank interest income declined every year since at least 2008. However, the firm's net income increased every year since at least 2008. With the exception of 2010, JP Morgan produced strong cash flows from operations. Total equity is increasing. Cash doubled at the end of 2011 compared to the end of 2010.

In 2012's third quarter, JP Morgan reported net income of $5.7 billion on $25.9 billion of revenue. Net income is on pace to be roughly $20-21 billion this year after coming in at $18.9 billion last year. The strong third-quarter financial performance was boosted by mortgage revenue growth of 72 percent. Basel I Tier 1 common ratio was 10.4 percent at September 30, 2012, compared with 9.9 percent at June 30, 2012, and 9.9 percent at September 30, 2011.

The growth in net income is a bullish value-relevant fundamental factor. Also, the increase in the Basel I Tier 1 common ratio shows improved liquidity, a bullish input. Further, the return on common equity and tangible common equity are increasing. The net interest margin narrowed to 2.43 percent from 2.66 percent. The firm set aside $684 million more towards its litigation costs during the third quarter mostly for mortgage-related lawsuits.

At the end of 2011, JP Morgan's financial leverage ratio was 12.34, higher than Bank of America's and Citigroup's. Given the same revenue growth, all else being equal, JP Morgan would increase earnings at a faster pace. Thus, JP Morgan has a higher return on equity than Citigroup or Bank of America. JP Morgan's net profit margin at the end of 2011 was excellent at 31 percent, much higher than its peers.

Based on the estimated intrinsic value using a present value dividend discount model, JP Morgan is fairly valued. Also, the multiplier model price-sales ratio suggests the firm is fairly valued relative to its recent price-sales valuations.

Segment Data

Investment banking revenue declined from $6.8 billion in the second quarter to $6.3 billion in the third quarter. Investment banking revenue in the third quarter of 2011 was $6.4 billion. Investment banking revenue has been between $4.5 billion and $8 billion since 2009. The provision for credit losses declined from $21 million to negative $48 million between the second quarter and third quarter.

Retail financial services revenue increased to $8 billion from $7.9 billion in the second quarter. In the third quarter of 2011, retail financial service revenue was $7.5 billion. Retail financial service revenue is trending higher and is near a previous peak of just under $9 billion reached in 2009. The provision for credit losses increased from negative $555 million to $631 million between the second quarter and the third quarter.

Card service and auto revenue increased to $4.7 billion from $4.5 billion in the second quarter. That compares with $4.8 billion in the third quarter of 2011. Overall, card service and auto revenue is trending higher, but has been between roughly $4.5 and $5 billion in the past few quarters. The provision for credit losses increased roughly $500 million to $1.2 billion.

Revenue from the asset management segment increased to $2.5 billion from $2.4 billion in the second quarter. That compares with $2.3 billion in 2011's third quarter. Asset management revenue is trending higher. The provision for credit losses declined from $34 million in the second quarter to $14 million in the third quarter.

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Investment banking revenue declined year-over-year and quarter-over-quarter, but the decrease in credit losses provision added to the operating segments net income. Retail financial services revenue increased year-over-year and quarter-over-quarter, however, the increase in credit losses provision weighed on net income. Card services and auto revenue increased quarter-over-quarter and declined year-over-year; the increase in credit losses provision decreased net income. Asset management revenue increased. Overall, the operating segments had good financial performance, in terms of revenue, in the third quarter. Further, loan-loss reserves declined by $900 million.

Conclusion

I continue to be bullish on JP Morgan. However, markets are due for a correction as uncertainty over the European sovereign debt crisis, U.S. elections, and U.S. fiscal cliff could drive shares to lower levels. Consumer sentiment reached a new high level for the recovery, according to the University of Michigan consumer sentiment data, dating back to 2009. While improving consumer sentiment is bullish for the common equity share price of JP Morgan, markets could decline as the good economic news is probably priced in. Markets tend to discount the future and shares prices could decline prior to a change in economic data. It would be wise to decrease long equity exposure.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

Source: JP Morgan: Buy On A Substantial Dip