🏦🇺🇸 Financials Oversold? JPM Showing Strength
Note: This is not financial advice, and any investment commentary is strictly opinion only. Consult with a licensed professional before investing.
JPMorgan Chase & Co., better known as JPMorgan or JPM, is the largest and one of the most influential financial institutions globally. The stock is up just 2.6% YTD but has climbed 20% in the last year and 66% since the lows of the pandemic. Financials have trailed behind tech and other industries, which may mean it is currently oversold. JPM has provided long-term value to investors through price appreciation and a dividend that grows annually.
Today, we detail everything you need to know about investing in JPM, including the many growth opportunities that JPM has at its disposal. We will also discuss what each business component, opportunity, and risk mean to you - the investor - so that you don’t go into any decision blind.
JPM's future HQ in New York City (under construction)
Source: ATCHAIN
First Republic Bank Acquisition
JPM was once again active on acquisitions by scooping up the bankrupt First Republic in May 2023. As regional banks felt the squeeze of interest rates rising, some customers got concerned and pulled their money, creating bank runs and ultimately bankrupting multiple establishments. JPM jumped in to acquire First Republic from a government agency that was holding the assets, as is common in bankruptcy proceedings. This is notable because JPM acquired $173bn of loans and $92bn of deposits for a discount, but also because JPM has greater than 10% of the US’s deposits, which should exclude it from buying other businesses with deposits. One of the loopholes of this rule is during times of distress such as this one, and as a result, JPM is allowed to get bigger faster.
The market reacted positively to the acquisition of First Republic, as it provided stability to an uncertain regional banking space while giving JPM an opportunity to grow when, under normal circumstances, they would be barred from doing so. The transaction was beneficial to JPM, given the discounted price paid, and it provided access to huge amounts of loans and deposits that would have taken years to get organically. The acquisition is a positive for the long-term growth of JPM as these loans and deposits should continue to grow over the years along with their current portfolio.
The winners of this whole ordeal? Large multinational banks. The banking sector as a whole became more concentrated toward the top because of the opportunistic acquisitions, along with large amounts of capital fleeing regional banks for safer, more reputable banks such as JP Morgan, Wells Fargo, and Bank of America. This trend is likely to continue as economic insecurity looms in the near future.
Understand the Business
JPM operates through several business segments. Each focused on different areas of financial services. The major business segments are:
Consumer & Community Banking (CCB): This segment serves individual consumers and small businesses. It includes retail banking, mortgage lending, credit cards, and auto financing.
Corporate & Investment Bank (CIB): CIB provides a wide range of services to corporations, financial institutions, governments, and other clients. It encompasses investment banking, treasury services, markets and securities services, and corporate derivatives. CIB assists clients in areas such as capital raising, mergers and acquisitions, trading, and risk management.
Asset & Wealth Management (AWM): AWM offers investment management, wealth planning, and retirement solutions to individuals, families, and institutions. It provides investment advisory services, asset management, private banking, and custodial services to help clients achieve their financial goals.
Commercial Banking (CB): CB serves mid-sized and large corporations, government entities, and non-profit organizations. It offers a range of financial services, including lending, treasury services, and trade finance solutions. CB aims to support the financial needs and growth aspirations of its corporate clients.
The diversity of these segments allows JPM to serve various customer needs and maintain a strong presence in different areas of the financial industry. This is important to investors for a few reasons:
First, it provides JPM with more stability than some competitors that are focused on one specific niche. If investment banking activity is down (like it is right now), JPM is able to partially offset that with its other business lines while Goldman Sachs and others have more dramatic increases or decreases.
Second, this complete set of services provides synergies for the bank. As a client, generally, dealing with fewer banks is a good thing. If a customer can do all their banking with one institution and have their asset management there, that is a benefit to them. As an investor, this can compound the growth that JPM experiences.
Source: JP Morgan 10-K
Banking Sector Competitive Overview
JPM operates in a highly competitive financial services industry. Some of its biggest competitors include Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
Most large banks in the U.S. provide similar services and would compete in all major segments that JPM does. Bank of America, Morgan Stanley, and Citigroup compete in all segments, while Wells Fargo mainly specializes in the consumer and asset management space. Finally, Goldman Sachs has a renowned investment banking and investment management business.
Banking grows at a moderate rate of GDP+ (about 2%) a year. This is true for commercial and consumer banking. Asset management is a rapidly growing sector by comparison and is expected to grow at 6% a year (PwC). While investment banking has currently decreased by 8%, it is expected to grow in the long run as GDP grows (PwC). JPM, with a strong foothold in all aspects of the banking sector, is expected to benefit from each of these growing subsectors.
Relative Valuation
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