This Is Why You Buy JPMorgan
The news hasn't been great for megabank JPMorgan (NYSE: JPM) lately. The bank's "London Whale" debacle has spooked investors, and CEO Jamie Dimon has lost some of his better-than-the-rest sheen that he had been strutting around with.
But with the bank's stock currently trading at 0.85 times its book value -- which is lower than the average valuation during 2008 and 2009 -- it may be time to remind ourselves of some of the high points of JPMorgan.
The Whale in perspective
There's good reason for investors to be fired up about JPMorgan's hefty losses in London. Not only was the trading in the bank's chief investment office out of control, but Dimon went out of his way to downplay what was going on. However, when we put the losses in the context of the CIO unit's performance over a longer period of time, it's clear that the unit has still been plenty profitable. Further, while the losses reduced the bank's income, it's still pumped out nearly $18 billion in profits over the past 12 months.
Going forward, there may actually be reason to be concerned that the crackdown on the CIO unit will reduce the income from that part of the business. If higher risk helped produce the recent losses, it may have also led to larger gains in previous years. If that's the case though, the improved stability and safety should still be a long-term positive for investors.
JPMorgan may be a $155 billion behemoth, but that doesn't mean that it doesn't want to get even bigger. Investors don't like to see the companies they own stagnate, and JPMorgan doesn't want to disappoint.
Given the turmoil at Washington Mutual that allowed JPMorgan to acquire it for a song, it may not be surprising that productivity at WaMu branches isn't up to the levels at JPMorgan's Chase branches. The bank thinks that it can close that gap and significantly increase its business as a result. There's also been an aggressive push by JPMorgan to grow its private client business -- its arm focused on generating relationships with affluent and "mass affluent" customers. In 2010, the bank had 16 locations serving its private client customers, and the target for 2012 is to have 1,000 or more of these locations open.
Then, of course, there's good old-fashioned growth through building new bank branches. At the end of the second quarter, the bank had added 223 branches from the prior year. It's also leveraging technology like ATM check depositing to try to make branches more productive and profitable.
All three of these growth areas -- increased WaMu productivity, private client, and new branch expansion -- are seen as $1 billion pre-tax opportunities by the bank.
Marquee investment bank
If you think that Goldman Sachs (NYSE: GS) is the undisputed king of investment banking, think again. Through the first three quarters of 2012, JPMorgan leads all banks in global investment banking fees. When it comes to merger and acquisition advising in particular, JPMorgan falls to third behind Goldman and Morgan Stanley (NYSE: MS) , but it's the leader in both equity and bond issuance.
JPMorgan's total fees came to just over $3.6 billion, edging out runner up Bank of America (NYSE: BAC) by close to $600 million.
There are risks, too
This doesn't all come risk-free, of course. Investment banking fees have been under pressure as activity in the capital markets has cooled. New banking regulations are curtailing some formerly profitable banking businesses and requiring that banks hold onto more capital. And for the big banks in particular, there's still lawsuit risk stemming from the financial crash -- for instance, the recent one filed by the New York attorney general against JPMorgan.
That said, although I wouldn't call myself a raging bull on the megabanks, I think there's increasing reason to see their low valuations and improving health as potential opportunity.
That other big bank
It's as clear as day that Bank of America wasn't run nearly as well as JPMorgan during the financial meltdown. In my view, former B of A CEO Ken Lewis may have arranged two of the worst acquisitions in corporate history as he greedily jumped on Countrywide and Merrill Lynch. But that was then. With Ken Lewis out, could B of A be a buyable bank today? Click here to check out the in-depth special report by Motley Fool bank analyst Anand Chokkavelu.