With $2.3 trillion of assets under management, over 260,000 employees and over $1.1 trillion in deposits, J.P. Morgan Chase (JPM) is the largest bank in the United States. It is currently recovering from a rare tumultuous period.
While J.P. Morgan weathered the financial crisis very well, it suffered a trading loss that shook the banking giant to its core. The institution's Chief Investment Office, which manages that bank's cash, lost $5.8 billion in the first half of 2012. While investigations are being conducted about the credit trades, the biggest consequence to J.P. Morgan was perhaps reputational, especially to Jamie Dimon, the bank's much-respected, longtime CEO. J.P. Morgan had managed to gain a reputation for strong risk management over 25 years during which it navigated with savvy growth through external acquisitions on the one hand, and volatile financial markets periods on the other hand.
Seeking to convince investors that the trading loss was in the rearview mirror, J.P. Morgan opted for overhauling the executive suite. Ina Drew, the emblematic head of the Chief Investment Office, resigned in the spring of this year. Douglas Braunstein, the firm's CFO since 2010, has seen his responsibilities diminished and is expected to step down. Other executives have resigned too, and additional senior-level shifts are expected, a significant hiccup at a bank known for the continuity of its leadership.
Skeletons In The Closet
As is the case for Bank of America (BAC), it will prove difficult for J.P. Morgan to know how much more of a legal bill it will inherit from the mortgage crisis. The bank is facing on-going lawsuits related to alleged misrepresentations of mortgage-backed securities it sold investors (including government-sponsored entities such as Freddie Mac and Fannie Mae), which in turn suffered large losses. Most of these legal proceedings are the legacy of the large financial institutions J.P. Morgan acquired, namely, Washington Mutual and Bear Stearns. Many analysts expect most lawsuits to settle, but the final total amount paid in settlements as well as the timeline to put these legal issues behind are anybody's guess. J.P. Morgan has set aside $15 billion in legal reserves since 2010; investors could be in for a positive earnings surprise if the bank has overbudgeted for legal proceedings.
Still A Strong Bank
J.P. Morgan is still a well-run institution, and Jamie Dimon is still one of the brightest minds of the banking industry. His intricate knowledge and past with his firm gives him an edge in managing it. He has, for instance, led the bank to ride successfully the home refinancing boom created by the current low interest rate environment, and J.P. Morgan is increasing again its commercial real estate lending, at a time when one can argue that numerous real estate projects are less risky than before.
J.P. Morgan beat analysts' earnings projections for the third quarter of this year, bringing much needed relief to its investors. It also posted a return on equity of 12%, at the top of its class. In addition, it enjoys a strong balance sheet, which would allow the bank to profit much from any consolidation that could occur within the banking sector in the future. Compare J.P. Morgan to Dwight Howard: while there have been concerns over the past season, he is still one of the best in the league.