JPMorgan faces headwinds but still on course
Despite many challenges, Jamie Dimon's bank will be one of the winners on the new Wall Street.
Analyst Todd Hagerman of Sterne Agee hit the nail on the head when he identified headwinds that JPMorgan Chase (JPM) is going to face in the coming months. They range from the sluggish global economy to the new regulatory environment and other "structural changes that are affecting most of the bank’s core businesses."
And maybe Hagerman is right to suggest caution when it comes to loading up on the bank's stock -- on Wednesday he cut his rating on JPMorgan shares to "neutral" from "buy." Certainly, JPMorgan's much-lauded CEO Jamie Dimon appears to have a tin ear regarding the world beyond Wall Street, having dismissed the financial crisis as just another cyclical downturn and, more recently, shrugged off populist outrage at the behavior of behemoth banks.
"I just don't get it," Dimon opined a couple of weeks ago about the Occupy Wall Street movement. "Acting like everyone who's been successful is bad and that everyone who is rich is bad."
While investing isn't a popularity contest, there are also some substantive reasons to be wary of the bank. Some of JPMorgan's decisions have been flawed in recent years: It has forked over north of $1 billion in fines and other payments to settle a raft of regulatory issues. These range from the now-familiar allegations that it failed to fully disclose details on investments to clients to the massive settlement of allegations in connection with the municipal financing issues of troubled Jefferson County, Ala.
Deplorable? Sure. But the behavior is not really that different from any one of the giant financial firms out there. And if you’re comparing it to its peers, JPMorgan looks like a real bargain -- a stock that now changes hands for about $33.52 a share, well below the $43.58 at which it began the year. If you’re not going to boycott the financial sector as a matter of general principle, this seems like the stock that you want to own.
True, there will be changes to the way financial markets work that make some parts of the business less profitable. But bankers are tremendously creative. If JPMorgan can't charge customers as much in fees as it used to, rest assured it will find new kinds of charges to levy. You might prefer to do your banking at a credit union, but when it comes to earning a return (and a not-too-shabby 3% yield while you wait), this may be the better way to invest.
JPMorgan also offers relative stability. While several other institutions fall into the "too big to fail" category, Dimon’s bank is arguably the most diversified and the most experienced in a number of arenas. For instance, after spending much of the decade playing runner-up to investment banks in underwriting stocks and bonds, JPMorgan now dominates that business with an 8.1% share of the $68 billion of investment banking transactions done globally in 2011, according to estimates by Dealogic. (Goldman Sachs, once dominant, could eke out only a 5.8% share of that revenue; Wells Fargo has only just broken into the top 10, with a 2.3% market share.) JPMorgan also had the single largest market share of the syndicated lending business, 11.2%, for 2011.
The days and weeks ahead are likely to be bumpy for JPMorgan. After all, Dimon has publicly acknowledged that the bank has actually increased its lending in Greece, Spain and Portugal. The strategic logic behind this may be impeccable -- while other banks pull back, often because of their own internal problems, JPMorgan with its stronger balance sheet can go in, cherry-pick loans and build long-term loyalty and market share.
But even if this move pays off in the shape of much higher market share, revenues and profits over the long haul, in the more immediate future it also means that the bank’s stock will be battered whenever ugly headlines about the eurozone appear, as they inevitably will. That is on top of the uncertainties about future trading revenues, and the burden imposed by new regulation, and a slew of other potential issues.
But looking past all the short-term and medium-term sturm und drang, it looks as though JPMorgan will be one of the long-term winners on the new Wall Street. Its stock can be bought today for seven times trailing earnings.
Of course, given the turmoil in the banking industry at home and abroad -- not to mention Dimon’s growing propensity to insert his foot in his mouth -- there’s a substantial risk that the stock will see further declines. But those selloffs will offer patient investors another chance to buy one of a handful of solid businesses that have proven expertise across geographical regions and product areas at an even greater discount. At the very least, what you could make on the bank's stock will help offset all those nasty extra fees for using your debit card.
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