Signature Bank of New York vs. JPMorgan & Chase Co.
Signature Bank of New York
Signature Bank of New York (OTCPK:SBNY) is a commercial bank that operates 25 offices through the New York Metropolitan area. SBNY serves privately owned businesses and its owners and offers a variety of deposit and loan options to its clientele. In addition to deposit and loan options SBNY also delivers asset management services including the management of equities, options, fixed income, and mutual funds. The main source of competitive advantage for SBNY is derived from its focus on customer service. It has relied on word-of-mouth as a driver of growth.
JPMorgan Chase & Co.
With a market cap of $205.05B, JPMorgan Chase & Co. (JPM) leads the financial sector as the largest bank in the world. In addition to various consumer and community loan services, JPM provides corporate and investment banking services that include raising capital, transaction services, advising on corporate strategy and structure, and risk management.
Earnings and Growth
SBNY reported Earnings per Share (EPS) of $1.07 through 1Q13, which has beat analyst estimates of $1.04. SBNY's business continues to sustain sturdy deposit and loan growth performances. According to JPMorgan Chase analysts, deposit growth for SBNY is up 18% and loans up 25% in the upcoming year. The industry is expected to deliver flat revenues. The beginning of 2013 marked an early feeling of optimism. Commercial real estate, multi-family loans, and specialty finance loans are up an average 38%.
Contrary to SBNY, JPM reported a 1Q2013 EPS of $1.59. According to analysts at Macquarie, EPS for the year is estimated to jump to $5.66 from $5.46. The jump in EPS was mainly driven by larger than anticipated loan loss reserve release. Loan loss reserves decreased to $20.8B from $21.9B.
Over the past five years JPM has invested in 800 new branches, 1200 Chase private client locations, 770 small business bankers, 300 investment managers, and 400 employees in Global Corporate Bank. Capital investment depressed earnings in the short term but should result in greater profitability moving forward. Although JPM is investing and changing its revenue structure, certain pressures are affecting the firm. In 2008, JPM acquired a bankrupt Washington Mutual and took over its portfolio of risky loans. Certain headwinds such as mortgage banking revenue, the Washington Mutual loan portfolio, and lack of credit leverage have negatively impacted JPM's profitability.
JPM's management was put under scrutiny when the bank was hit hard in 2012 for a historic trading loss that cost the company $6B. Recently, JPM has been losing revenue due to taking credit risk off the balance sheet through the run-off of riskier mortgages as well as a run-off of the Washington Mutual loan portfolio. JPM has responded to a fall in revenue by generating growth through fees. As fees add up, revenue will start to show income generating results. However, with headwinds due to the run off of risky assets and a pressured NIM, I believe JPM will start generating higher earnings in the long run. In addition to changing the structure of JPM's revenue mix, growth & performance in JPM's commercial banking sector has declined with tightening loan spreads and a reduction in Net Interest Income (NII).
SBNY's management expects pressure on the company's Net Interest Margin (NIM) in the coming quarters due to loan pricing competition occurring with the entrance of new players within the metropolitan NYC real estate industry. Management has characterized the competitive environment as being very high and borderline irrational. As a result NIM is estimated to be pressured down 0.05%-0.10% in 2Q2013 and 0.03%-0.07% in subsequent quarters. Despite management's concern regarding a weak NIM and new competitive firms within the industry, analyst reports reveal that revenue growth is occurring even with a lower NIM and core expenses reported below estimates. While the NIM is a concern to SBNY, NII is an important driving factor for shareholder value. NII is estimated to grow 11% in 2013. SBNY is operating new businesses with a lower spread; however the company is still generating enough cash flow for the benefit of investors.
The commercial banking performance along with pressure on loan growth led a lower estimate of NIM for JPM. 1Q13 NIM is 2.37%, down from 2.40% in 4Q12. NII is expected to decline by 1% with loan growth as the driving factor.
Credit trends continue to improve for SBNY. Non-performing asset (NPA) ratio at 0.19% is well below the industry average of 1.25%. NPA ratio explains the amount of assets with high risk of defaulting in relation to the amount of assets the institution holds altogether. Reserve to Loan ratio is at 1.25 indicating SBNY has enough economic capital in case of financial distress.
The NPA ratio for JPM is trending down according to analyst estimates. 1Q13 NPA ratio was recorded at 0.48% slightly lower than the 4Q12 reported 0.50%. JPM still has many underlying risks with the acquisition of Washington Mutual and the inheritance of Providian, the consumer credit card company that went bankrupt. As a result of the acquisitions, JPM undertook risky portfolios with a higher probability of default.
My recommendation is to hold SBNY and JPM. SBNY is poised for growth in deposits & loans. However, the bank does not look as valuable due to struggles in the price war competition. JPM should be a hold as well considering slow growth and the amount of non-revenue producing risky portfolios such as Washington Mutual and other non-performing assets. JPM's increase in fees should result in greater profitability in the long term. However, with new investments depressing earnings, short term earnings will be slow to grow.
SBNY's strong growth, its low credit risk compared to competitors within the industry, and its ability to produce income given the pricing competition makes SBNY a stronger and smarter investment when comparing to a firm like JPM.