Crisis winner tag does little for JPMorgan value

April 13, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

JPMorgan came through the financial crisis as a winner. And the bank’s $5.6 billion first-quarter profit reinforces its position as a market leader with strong risk management. But the tag has not done much for the bank’s valuation. At less than 10 times expected 2011 earnings, JPMorgan trades at a lower multiple than its big U.S. bank brethren.

In isolation, the multiple doesn’t look too out of whack. It implies that shareholders don’t expect much growth in core earnings any time soon — and there’s already evidence of that, with revenue slipping 3 percent and pre-tax, pre-provision profit dipping 8 percent from last year’s fourth quarter.

And doubts remain about the impact on the financial sector of new regulations and capital rules that are still being debated. But that hits all banks — and JPMorgan Chief Executive Jamie Dimon has a track record of being more open and forthright about their impact than others.

Moreover, despite the revenue drop, JPMorgan is doing a better job with what it has, in part as it releases more loan loss reserves. It managed a 10 percent return on equity last year — better than Citigroup’s, while Bank of America posted another loss — and improved that to 13 percent annualized for the first quarter. In addition, the Federal Reserve has given the green light for JPMorgan to both quintuple its dividend and to buy back stock. Yet Citi, which only has approval to increase its dividend by a token amount, trades at 11 times this year’s earnings. Even BofA, which has had its capital plan rejected, trades at 10.6 times earnings.

Granted, its advantages have helped JPMorgan’s stock performance beat its peers so far this year: its shares are up 10 percent, while most others are either barely up or have even fallen a percent or two. But it still leaves one of the strongest, best performing banks in the sector trading at a discount to its peers. That’s scant reward for success.

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