JPMorgan Stock: The Best of a Not-So-Good Bunch
The greatest competitive advantage in banking is not screwing up, and on that point one has to hand it to Jamie Dimon, the CEO of JPMorgan Chase & Co. (JPM) Alone among these four giants of banking, JPMorgan managed not to report a quarterly loss during the recent financial crisis.
How? JPMorgan dove less deeply into the subprime lending waters than most of its competitors. And it came into the crisis period with a strong balance sheet and plenty of liquidity. So, JPMorgan ended up being a source of strength to the banking system – buying the carcasses of Bear Stearns and Washington Mutual – rather than a weakness. Dimon gets an “A” in civics.
Having kept some of his powder dry, Dimon, in addition to scooping up those two huge acquisitions, quickly began hiring talent and seeking to grab market share from weaker banks as the crisis ebbed. Give him points for having a killer instinct, too.
Oh, make no mistake: JPMorgan took plenty of lumps – tens of billions of dollars of loan losses. And the mess isn’t entirely cleaned up yet.
But compared to his peers at Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC), Dimon better managed the risks inherent in banking. And JPMorgan has been rewarded with the higher market capitalization.
In the first half of 2010, JPMorgan profit continued its steep recovery, with net income of $8.1 billion, or $1.83 a diluted share.
And by some important measures, JPMorgan shares look cheap.
So, what’s not to like? For one thing, JPMorgan operates a huge investment bank, which leads to higher volatility in results, as opposed to Wells Fargo, which is more focused on consumer and small business banking.
But mostly, what’s not to like is the very bigness of the biggest banks, JPMorgan and its $2 trillion of assets included. The biggest were deemed too-big-to-fail. And they also appear too-big-to-manage — at least with the greatest efficiency. Banks somewhat smaller than the biggest tend to operate more efficiently, having achieved economies of scale without becoming unwieldy.
Note below that only Wells Fargo among these big four managed to post a sustained period of return-on-equity in the high teens. Dimon came aboard JPMorgan with the Bank One acquisition in July 2004, and pushed the results up nicely in the years after that. But ROE topped out in the mid-teens.
Maybe he can do better. And he can certainly be expected to out-perform Citigroup and perhaps Bank of America. Hard to say vs. Wells Fargo. But even being the best of this bunch doesn’t necessarily mean you’re all that good.
Disclosure: No Positions