JPMorgan deserves a little more investor love
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
JPMorgan deserves a little more love from its shareholders. Granted, its fourth-quarter earnings werenāt great. But overall, JPMorgan is in a solid position. And yet its stock languishes at around three-quarters of book value. Itās time for investors to overcome their fear.
The reticence to do so is perhaps understandable. With Europeās woes continuing and a lack of clarity on a variety of new industry rules and regulations, it has been hard to regard virtually any bank stock as a screaming buy. And JPMorganās 11 percent return on tangible equity in the three months to December, which relied on a lowly 21 percent tax rate, isnāt much to write home about.
But Americaās largest bank by assets continues to cut loan losses and release more from reserves. Itās also lending more ā and at a pace thatās slightly above the industry average. And itās likely be in a position to increase its dividend and buy back more shares after the Federal Reserve-administered stress test this March.
Chief Executive Jamie Dimon is even keeping pay in check. The bank only set aside more lucre for its staff when units performed better or, as was the case with retail banking, hired more people. It even delivered almost $1 billion more to shareholders by cutting compensation for its Wall Streeters, a 9 percent drop compared to 2010, even though revenue was flat and profit rose slightly.
In addition, JPMorgan usually earns more than its cost of capital. Bulking up its common equity under Basel III to 9.5 percent of risk-weighted assets shouldnāt affect that either. All else being equal, the bank needs another $25 billion or so of qualifying equity capital to hit the target. Generating a 15 percent return on that requires $22.5 billion of profit a year, $3.5 billion more than it did in last yearās dismal markets. Falling mortgage losses should take care of much of that.
Shareholders, however, arenāt ready to trust projections, preferring to wait till they can verify progress. Perhaps the Fedās stress test results will do the trick. Thatāll be bittersweet for Dimon, though. If it makes investors bullish, buying back stock will be considerably more expensive.