Be A Cynic: JPMorgan A Buy On Scandal?

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The scandals JPMorgan Chase (JPM) has wrought on itself may seem horribly damaging. But the bank’s inexpensive shares offer a dividend yield of nearly 3% and a company whose business prospects are arguably at least as good as those of any other gargantuan bank. To investors, that could add up to atonement for JPMorgan in the long run.

The current focus is on the scandals. To reiterate, at least seven different federal agencies, several state regulators and two foreign nations are investigating JPMorgan for alleged questionable practices ranging from manipulating commodities markets to bribing Chinese officials. JPMorgan agreed to pay $920 million in fines and admit to guilt in the London Whale trading scandal, a trade that lost the bank $6.2 billion. And now there’s an expected $11 billion, or more, settlement tied to the sale of crummy mortgage securities last decade.

JPM Chart

NYSE:JPM data by YCharts

Right now, JPMorgan shares are the cheapest of any mega-cap in the S&P 500, as the YCharts Stock Screener shows. Its shares are trading at about 8.9 times expected 2014 earnings.

It’s important to note, however, that JPMorgan shares remain surprisingly close in valuation to its less scandalized peers -- Citigroup (NYSE:C), Wells Fargo (WFC), Bank of America (BAC) – based on forward PE ratio.

JPM Forward PE Ratio Chart

JPM Forward PE Ratio data by YCharts

Those valuations aren’t surprising. The banking environment has been tough lately, with new credit requirements, extremely low interest rates (and thus narrowed spreads), and sluggish economies worldwide. In many ways, JPMorgan looks better set to handle these difficulties than others. Much of its income comes from trading, where the company tends to do well, despite the London Whale debacle. It’s the number one credit card issuer in the country and manages some $2.2 trillion in client assets. Both of those divisions grew at double-digit rates last quarter by their key metrics. Even in its latest annus horribilis, JPMorgan chalked up better revenue growth than competitors.

JPM Revenue Quarterly YoY Growth Chart

JPM Revenue Quarterly YoY Growth data by YCharts

The big risk here is whether the costs, financial or otherwise, of its mistakes will soon end. Despite the huge legal costs, twice as many analysts recommend buying the bank’s shares as not. Fines, even enormous ones, barely ding a company that earns some $10 billion a quarter on net interest income alone. And net interest income – the difference between loan rates and the cost of servicing them – is extremely difficult to get in today’s low-interest rate environment. If interest rates rise, that income will go up too.

JPM Net Interest Income Quarterly Chart

JPM Net Interest Income Quarterly data by YCharts

Much has been made of the admission of guilt that regulators squeezed out of JPMorgan in the London Whale episode, and may yet get from the company for other transgressions. But the market cares very little about morality issues unless they greatly impinge on the company’s ability to make money going forward. We suspect they won’t. Forgiveness comes quickly when everyone is making money.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.


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