Source: JPMorgan
JPMorgan Chase (NYSE:JPM) has an incredibly long history dating back to 1871 and has grown to become the largest bank in the US and fifth largest globally with over $3.2 tln in assets. It is a highly diversified financial institution that excels at every segment it is in. The bank's core businesses span across a multitude of areas within the banking industry including consumer and commercial banking, investment banking and wealth management. Moreover, the bank has a solid track record with a strong management team and leadership and has managed to emerge from the GFC better off than its peers. The bank has a conservative portfolio with excellent business strategy execution.
With the advent of Fintech, financial institutions risk losing market opportunities to emerging fintech companies such as Square (SQ) and PayPal (PYPL). JPMorgan understands the real risk of getting left behind and is increasing investments and securing partnerships with startups and developing new solutions to cater to evolving consumer demands and be placed to withstand the disruption pressures from Fintech firms. Additionally, JPMorgan is planning to resume its share repurchase program with a record amount of $30 bln after a restriction by the Federal Reserve was lifted as well as boasting a strong dividend track record. In the final section, we valued the company based on a modified discounted cash flow valuation method by adjusting its free cash flows only including cash flows not related to its core operational activities to obtain a more reflective stream of free cash flows used for the valuation.
The bank has a highly diversified business model operating across four major operating segments namely consumer & community banking, corporate & investment banking, commercial banking and asset & wealth management. In terms of its revenue breakdown, the corporate & investment banking segment contributes $49.2 bln or 40.1% in revenues. Although growth is expected to taper off, the long-term outlook of the segment remains positive as the firm maintains its position being involved in notable upcoming IPOs. The consumer & community banking segment remains the largest segment at $51.3 bln or 41% of revenues despite declining by 7% in 2020 as interest rates fell. We believe the low interest rate environment will persist within the current uncertain economic environment leading to pressures on the segment's outlook. Besides that, the other segments of asset & wealth management and the commercial banking segment account for 11.6% and 7.6% of revenues respectively providing the firm with a highly diversified revenue base as it continues to expand by deepening its client network relationships to grow its loan portfolios and AUMs.
Source: JPMorgan
Strong Diversification with Massive Scale Across All Segments
A key strength of JPMorgan is its diversification across various areas in the financial sector including investment, consumer and commercial banking as well as asset & wealth management. It excels in these segments and has an incredibly wide client network consisting of 63 mln households and over 4 mln small businesses in consumer banking, 30,000 middle-market customers, 1,700 corporate banking customers and 1,100 commercial real estate banking customers. It benefits from its strong brand reputation as an all-round financial institution with deep client relationships as well as provide stability to its financial performance which remains resilient even with heightened market uncertainty. In 2020, falling interest negatively impacted its consumer banking's net interest income but was offset by stronger growth in the investment banking and asset management segments which benefited from easing monetary policy and stimulus from central banks.
Investment Banking
JPMorgan is the largest investment bank in the world in terms of investment banking fees comprising advisory and underwriting revenues with a market share of 9.6% ahead of Goldman Sachs (GS) and Bank of America (BAC). It offers a range of investment banking, market making, prime brokerage and securities products and services to a global client base of corporations, investors, financial institutions and governments. Its strength stems from its strong bond underwriting and loan syndication capabilities where it is the largest DCM player accounting for 7.5% of total DCM activity with deals valued at 678 bln done in 2020. In equity underwriting and M&A (ECM), JPMorgan is also fairly dominant at third place with deals valued at $91 bln only behind Goldman Sachs and Bank of America. Its firm position in these areas reflects its strong capabilities and leadership it has established.
Source: Statista
While the firm's investment banking fees has shown strong growth in 2020, its outlook in 2021 is faced with several headwinds. While the Federal Reserve has announced that it is continuing accommodative policy, increasing inflation expectations and record high cash balances on corporate balance sheets pose headwinds for the demand for additional capital. According to S&P Global, bond issuance volumes is forecasted to decline by 3.2% due to these headwinds. We expect the industry cooldown to affect the firm's debt underwriting revenues which have grown in tandem with the market.
Source: JPMorgan, S&P Global
On a bright note, M&A and IPO activity remains strong in 2021 with the record low interest environment spurring IPO and M&A activity and a more positive economic outlook. As of February, there have already been 223 IPOs signaling a strong environment and demand and JPMorgan is poised to benefit from the elevated activity as the bookrunner for some notable upcoming IPOs tabulated below. We continue to expect the company to secure more deals as the year progress owing to its strong capabilities and leading track record.
JPMorgan IPOs in 2021 | Estimated Potential Deal Value ($ mln) |
Toast Inc | 20,000 |
Grab | 2,000 |
Oatly | |
Waldencast Acquisition (SPAC) | |
Olo | |
Acies Acquisition II (SPAC) | |
Sona Comstar | |
Atotech | |
Coupang | |
Qualtrics | |
Talis Biomedical Corporation |
Source: Nasdaq, PYMTS, GlobalCapital, GlobeNewsWire, PRNewsWire
Moving on to its trading segment (Capital & Market Services), industry analysts expect growth to taper off in 2021 as volatility winds down and trading activity normalizes according to S&P Global. JPMorgan has achieved strong growth of 34% in 2020 driven by higher fixed income and equity trading revenues which grew 45% and 33% respectively. The sharp rise in growth was triggered by heightened capital market volatility which saw trading volumes surge in Q2 2020 in both equity and fixed income markets. In October 2020, the average daily volume of shares traded has declined 41% from the peak in March 2020. Likewise, JPMorgan's Q4 2020 equity trading revenues showed a decline of 16.4% from Q2 2020. Similarly, fixed income revenues were down 16.4% during the same period. All in all, we expect trading activity to remain elevated, but below the peak seen in the first half of 2020. Though, we expect its outlook to become more positive beyond 2021 as trading activity continues to increase over time as markets become more developed and participation rises.
Consumer & Community Banking
Another highly significant segment is the consumer banking division under the Chase brand. Since its acquisition, the bank has grown its footprint serving over 63 mln households and over 4 mln small businesses. The scale of its distribution network gives it a competitive advantage with deep client relationships. The deposits these customers bring are the outcome of that relationship. The bank has moved up to the top in terms of national retail deposit market share at 9.8% with $958.7 bln of deposits based on its annual report.
Source: JPMorgan
Its strong deposit base supports its lending business which encompasses consumer & business banking, credit card, home lending and auto loans. In 2020, due to the economic uncertainty, the firm's loan portfolio decreased by 7% which was offset by an increase in consumer and business banking due to the Paycheck Protection Program ('PPP') which contributed $19.2 bln. However, we anticipate a better outlook for consumer loans in 2021 as the economy recovers globally. The World Bank forecasts global GDP growth to recover to 3.5% in 2021 after a 3.6% contraction in 2020.
Consumer & Community Loan Portfolio ($ mln) | 2019 | 2020 | Growth % |
Consumer & Business Banking | 29,585 | 48,810 | 65% |
Home Lending | 213,445 | 182,121 | -15% |
Card | 168,924 | 144,216 | -15% |
Auto | 61,522 | 66,432 | 8% |
Total | 473,476 | 441,579 | -7% |
Source: JPMorgan
The major segments that were affected the most were the home lending and card segments which both declined by 15%. Last year, the firm implemented stricter lending criteria for mortgage loan borrowers as a safety precaution to mitigate default risk amid the economic slowdown. Notwithstanding, we expect the firm's home loan originations to recover this year as the National Association of Realtors predicts new-home sales to rise by 21% and existing-home sales rising by 9% with the economic recovery. Also, JPMorgan is among the top four mortgage originators in the US by loan approvals according to S&P Global.
Whereas for card lending, global retail sales are projected to recover in 2021 growing by 2.3% after declining 3.2% in 2020 supported by rising consumer confidence globally. JPMorgan is poised to benefit from the recovery due to its industry leading position in the card issuer market with a 16.6% market share as seen in the chart below. To maintain its lead and grow further, the firm has acquired the technology platform of credit card rewards business cxLoyalty to enrich its card loyalty program for millions of Chase customers.
Source: CardRates
Moreover, the firm is committed to growing the segment by increasing its footprint across the country with planned branch openings. In the latest earnings briefing, the company highlighted its expansion targets and cited strong demand for branches. The bank stated that it has been continuing to execute its branch expansion plans in new markets, having opened 170 branches so far out of a planned 400, and expect to be in all contiguous 48 states by 2021.
In addition, the bank is growing its digital and mobile customer base as part of its digitalization strategy and is providing a seamless account opening process which takes only 3 to 5 minutes to open an account. According to the firm, digital account opening now constitutes 25% of new account activity which highlights its commitment towards embracing digitalization. Its digital customer base has grown by 7.1% on average in the past 5 years.
JPMorgan Digital and Mobile Customers ('000s) | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Active Digital Customers | 39,242 | 43,836 | 46,694 | 49,254 | 52,453 | 55,274 |
Growth % | 11.7% | 6.5% | 5.5% | 6.5% | 5.4% | |
Active Mobile Customers | 22,810 | 26,536 | 30,056 | 33,260 | 37,315 | 40,899 |
Growth % | 16.3% | 13.3% | 10.7% | 12.2% | 9.6% |
Source: JPMorgan, CB Insights
Commercial Banking Segment
JPMorgan also has significant exposure to the commercial banking segment with over 18,000 commercial clients and over 34,000 real estate owners and investors. It has doubled its footprint across the country adding branches in over 20 states and hiring 500 bankers. Among the three customer segments, the Middle Market segment representing SMBs is the largest accounting for 38.7% of the segment's revenues. It is also the fastest growing customer segment at a CAGR of 34% and the bank targets to achieve $10 bln in revenues in the long term. To achieve this target, the firm is adopting a unique approach by embracing fintech with a partnership to serve the segment better. It is one of the first to partner with Fintech startups such as On Deck Capital (ONDK) for its short-term and quickly funded Chase Business Quick Capital small business loan. The aim is to provide more convenient access to its services while leveraging data analytics to serve the segment better. With the growing demand for financial services and loan from the SMB market, we believe that the firm is well positioned to capitalize on the opportunities through its wide client base and expansion strategy by increasing its footprint.
Source: JPMorgan
Asset and Wealth Management
Lastly, the asset & wealth management segment is a global leader with client assets of $3.7 trillion. Its clients include institutions, high-net worth individuals and retail investors in major markets globally. The segment offers investment management across most major asset classes including equities, fixed income, alternatives and money market funds. In 2020, the segment represented $14.24 bln or 12% of revenues. As of 2020, JPMorgan reported an AUM of $2.7 tln which was up 17% driven by inflows into both liquidity and long-term products as well as higher market levels. In terms of competition, JPMorgan is the sixth largest asset manager by AUM behind BlackRock (BLK), Vanguard, State Street (STT), Fidelity Investments and Allianz (OTCPK:ALIZF). Impressively, it is the only major asset manager with a large-scale banking operation. The firm's expansion plans include increasing its talent force of financial advisors by hiring as many as 4,000 advisors over the next 5 to 6 years which is roughly double its current base.
Source: Statista
Strategy to Prepare for the Emergence of Fintech
JPMorgan understands the threat of being left behind by the emerging Fintech industry and has made tech investments a top priority. The bank's strategy involves partnering, investing, acquiring Fintech startups as well as building its capabilities in house. Its partnerships involving companies such as Kroger (KR), Tock, Meijer, BigCommerce (BIGC), Samsung Pay (OTCPK:SSNLF) and Braintree to advance its payments capabilities. Besides that, it has also invested in startups such as LevelUp, TouchBistro, Bill.com (BILL) and Zelle because it saw the tremendous potential these technologies can bring to its core operations to meet customer demands.
It has also acquired startups such as WePay for $400mln to make it easier to seamlessly integrate Chase payments into software commonly used by small businesses. WePay's APIs allow simple integration of payments and JPMorgan is seeking to migrate its more than three million small business customers to the new service. Its other acquisition involved MCX's payment technology. MCX is the largest merchants' network in the US with partners such as Walmart (WMT), Shell (RDS.A), Phillips 66 (PSX) and Wakefern. The acquisition allows MCX's members to connect to Chase Pay seamlessly. Besides that, it also recently acquired 55ip, a fintech start-up that helps financial advisors automate the construction of tax-efficient portfolios
Source: CB Insights
Besides payments, the firm is also investing in AI and cloud to handle more complex tasks. For example, the use of AI in its consumer banking segment to automate underwriting and approval of loans which provides costs savings of $150 mln. In trading, the firm's uses its Deep X machine learning to assist its trading algorithms to minimize errors and increase efficiency.
Compared to its peers, JPMorgan has the highest tech budget worth $10.3 bln in 2020 which highlights its commitment to its digitization strategy. However, in terms of percentage of tech spending based on revenues and expenses, Citigroup (C) has slightly higher tech spending allocations at 9.9% and 15.5%. Rather than acquiring startups, Citigroup's strategy is focused on collaborating with Fintech startups and developing its solutions in-house such as its open platform for API development to create an ecosystem of digital products and services. In comparison, JPMorgan has an all-round strategy of acquiring, investing and partnering with Fintech startups which allows it to maximize the integration potential with its core operations.
Bank | Tech spending ($ mln) | Net revenues ($ mln) | Non-Interest expenses ($ mln) | % Tech spending based on net revenues | % Tech spending based on non-interest expenses |
JPMorgan | 10,338 | 119,543 | 66,656 | 8.65% | 15.51% |
Citigroup | 7,383 | 74,298 | 42,781 | 9.94% | 17.26% |
Bank of America | 7,141 | 85,528 | 55,213 | 8.35% | 12.93% |
Goldman Sachs | 1,347 | 44,560 | 28,983 | 3.02% | 4.65% |
Morgan Stanley (MS) | 2,465 | 48,198 | 33,780 | 5.11% | 7.30% |
Source: JPMorgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley
Record Stock Repurchases and Dividend Growth
JPMorgan's board has authorized a share repurchase program of $30 bln expected to begin in Q1 2021. This is significant because it represents the highest share purchase ever conducted by the firm, following the lifting of restrictions on share repurchases to ensure sufficient capital is held and the stability of the banking industry. Based on the current share price of $148, this translates to roughly 202.7 mln shares to be repurchased which raises the valuation as the number of shares outstanding is reduced by that amount. Supported by its fortress balance sheet with ample liquidity, we believe that the share repurchase will be beneficial to shareholders.
Source: JPMorgan
Although JPMorgan is not part of the S&P 500 Dividend Aristocrats Index, it has consistently paid out dividends with an average payout ratio of 36% in the past 10 years. Moreover, the bank has raised its dividends at a CAGR of 17% in the past 10 years. In addition, the company intends to maintain a quarterly dividend of 90 cents per share for Q1 2021.
We will continue to maintain a fortress balance sheet that allows us to safely deploy capital by investing in and growing our businesses, supporting consumers and businesses, paying a sustainable dividend, and returning any remaining excess capital to shareholders. - CEO Jamie Dimon
Source: JPMorgan, DividendScholar
Regulatory Penalties
As one of the largest financial institutions in the world, the firm faces unique regulatory scrutiny especially in the aftermath of the GFC which has led to sweeping regulations across the industry. Due to its size, strong internal controls are crucial to avoid regulatory risk, but it has from time and time shown that internal controls remain an issue. The firm's regulatory threat is seen across its various market segments in banking. An example is where its investment banking arm was recently fined $920 mln by the DOJ for market manipulation involving unlawful trading of commodity and fixed income derivative contracts by its traders who were engaged in price manipulation and spoofing activities.
Separately, the firm was fined for $250 mln in 2020 after US regulators found that its risk management controls were deficient and did not avoid conflict of interest. Thus, the firm's internal controls appeared to have been inadequate and management has assured that it will put in place measures to mitigate future risk. If the firm fails to implement adequate internal controls especially considering the size of the institution, it risks raking up more fines which would affect our valuation.
Valuation
When comparing JPMorgan against its peers based on the valuation metrics, it is found that the firm is trading at a premium with a higher industry average ratio across all metrics of the bulge bracket banks. However, we fell that this would not result in an accurate valuation of the firm despite the higher industry average ratios which do not account for its competitive strengths as a truly diversified market leader across all major financial market segments.
Company | P/E | P/S | P/B | EV/S | EV/B | PEG |
JPMorgan | 13.94 | 4.27 | 1.73 | 14.71 | 5.96 | 1.57 |
Goldman Sachs | 9.69 | 2.63 | 1.29 | 7.29 | 3.58 | 0.70 |
Morgan Stanley | 11.41 | 2.48 | 1.47 | 6.88 | 4.08 | 0.47 |
Bank of America Merrill Lynch | 17.84 | 3.94 | 1.16 | 7.54 | 2.22 | 2.51 |
Citi Group | 12.63 | 2.27 | 0.73 | 7.01 | 2.25 | 1.55 |
UBS | 11.44 | 1.72 | 0.93 | 1.38 | 0.75 | 3.96 |
Credit Suisse | 10.43 | 1.41 | 0.67 | 5.67 | 2.69 | 0.21 |
Deutsche Bank | 17.62 | 0.91 | 0.32 | -0.57 | -0.20 | - |
Barclays Capital | 17.62 | 1.18 | 0.4 | -2.13 | -0.72 | 1.22 |
Average | 13.62 | 2.31 | 0.97 | 6.24 | 3.08 | 1.57 |
Source: Seeking Alpha, MacroTrends
Further analyzing JPMorgan's financial performance ratios against the bulge bracket banks, there is a contrast between their performances and value. While JPMorgan has higher valuation metrics than average which signifies a premium on the firm, it has significantly better performances than the industry average in terms of revenue and profitability growth which is stable and positive in the midst of an industry facing tight scrutiny from regulations impacting growth. Among the banks compared, only Morgan Stanley has fared slightly better than the firm. Additionally, JPMorgan has a very high return on tangible common equity which is an important indicator of profitability in the financial industry of 14% compared to 9.1% for the industry.
Company | 5Y Revenue CAGR | 5Y Net Income CAGR | ROA | ROE | ROTCE |
JPMorgan | 2.7% | 3.6% | 0.9% | 11.3% | 14.0% |
Goldman Sachs | 4.2% | 9.2% | 0.8% | 10.9% | 11.8% |
Morgan Stanley | 6.5% | 12.4% | 1.2% | 13.7% | 15.2% |
Bank of America Merrill Lynch | -1.4% | 2.4% | 0.6% | 6.7% | 9.5% |
Citi Group | -3.4% | -8.0% | 0.5% | 5.8% | 6.9% |
UBS (UBS) | -1.3% | -1.1% | 0.6% | 11.6% | 12.9% |
Credit Suisse (CS) | -2.8% | 1.6% | 0.5% | 8.5% | 6.6% |
Deutsche Bank (DB) | -8.8% | - | -0.1% | -5.6% | 1.5% |
Barclays Capital (BCS) | -3.1% | - | 0.2% | 3.0% | 3.2% |
Average | -0.8% | 2.9% | 0.7% | 7.3% | 9.1% |
Source: Seeking Alpha, MacroTrends
Valuing the firm is particularly challenging because of the stretched valuation metrics which reflects JPMorgan's superior capabilities. A valuation based on comparable industry analysis would result in the firm being overvalued. To obtain a more reliable valuation, we applied a modified DCF analysis by computing the firm's free cash flows. Usually, this is challenging for a financial institution as its investing cash flows reflect the changes in loans which results in the FCF calculations being volatile. As we view its loan activities as part of its ordinary business operations, we decided to exclude all cash flows relating to changes in loans, and only included relevant investing cash flows not related to lending activities, as our capex assumptions, to derive the investing cash flows that are not part of the firm's core operational activities. The result is a more reflective stream of free cash flows which is used to value the company.
Furthermore, our terminal value is based on an industry EV to book value ratio which is more suitable to financial companies, rather than an EV/EBITDA multiple. The EV to book value reflects the forecasted growth in the firm's equity value which is a more useful to analyze financial companies. We obtained the terminal value by multiplying the projected equity value of $414.6 bln in 2031 with the investment banking industry average EV/B of 3.08x.
The revenue projections are based on analyst consensus estimates of a 3.5% decline in 2021, with growth in investment banking tapering off as interest rates are assumed to remain low for the foreseeable future. Based on a discount rate of 8.3% (company's WACC), our model shows an upside of 23.78%. The company's share repurchase program is accounted for, with the number of shares outstanding expected at 2,884 mln at the end of the year, after deducting an estimated 200.2 mln shares repurchased based on the current market price.
Source: Khaveen Investments
Verdict
No part of the financial industry was spared the impact of the pandemic and economic slowdown in 2020, including JPMorgan. In the firm's case, its strong diversification across all areas of banking enabled it to withstand heightened market volatility with declines in the consumer segment due to lower interest rates offset by growth in the investment banking and wealth management business. This not only highlights how well diversified the firm is, but also its resilient business model and market leadership. The firm has a strong market position in consumer banking and investment banking as where it can leverage its deep client relationships. Although investment banking growth is expected to taper off in 2021, the anticipated economic recovery provides upside for its consumer banking business which it continues to expand with its digitalization strategy which has seen its digital clients continue to grow. In the long-term, we expect the firm's expansion strategies across all segments and priority on Fintech to enable it to retain its firm market leadership. With the record share repurchase announced, it provides additional incentive for shareholders on top of its strong financial performance. Overall, we rate the company as a Buy with a price target of $183.22.
