Four years ago, pundits were still brooding over whether U.S. banks would be able to survive the fallout from the financial crisis. Today, as we watch a flood of new cash from individual investors flowing into stocks and pushing the S&P 500 higher at a rate that, if it continues for the rest of the year, will leave the index with a gain of more than 32%, some of the biggest beneficiaries are banks. They, after all, had the most ground to recoup after the events of 2008.
But once again, the question arises: are we being saps? The Warren Buffett approach is to buy when the rest of the market is cowering in fear, and flee when irrational exuberance takes over. When it comes to banks, he practiced what he preached, his Berkshire Hathaway (BRK-B) stepping in to provide backup capital to Goldman Sachs (GS) at very advantageous (to him) terms at the height of the crisis, and to Bank of America (BAC). Buffett has also expressed a fondness for Wells Fargo (WFC), one of his largest financials holdings.
In this third installment in our short series questioning whether “the saps are getting into the market”, we’re going to look at the country’s biggest bank, J.P. Morgan Chase (JPM). It isn’t one of those that Buffett has targeted as a big holding, but in many ways it is more interesting. During 2012, it hit the spotlights for all the wrong reasons, as a large and poorly-managed trading position went badly wrong, costing the bank some $6 billion in actual losses and at one point, more than $50 billion in market capitalization.
JPMorgan Chase is one of the widely-held banks that is on a tear this year, benefitting from an increase in new loans (particularly in mortgages) and solid performances from most of its other businesses. So far in 2013, the bank’s stock has posted a return of 5.54%, double that of the S&P 500. But once again, if we return to the doldrums of March 2009 – as we have done earlier this week in the case of Chevron (CVX) and Pfizer (PFE) – we find that the rally started much earlier – all the way back in the spring of 2009, in fact. As the chart above shows, investors who didn’t hold their noses and jump in back then forfeited the lion’s share of the gains to be made. And those weren’t simply absolute gains, but big relative outperformance, as the bank’s stock has soared 144.2% since then, while the S&P 500 has returned a less impressive 110.7%.
It isn’t too late to jump into JPMorgan Chase, of course. This is the country’s biggest bank, and as such, it has a dominant position in most parts of the financial world that it consolidated during the crisis as one rival after another collapsed. And its earnings are growing in absolute terms, even if, as the chart above shows, the rate of that growth seems to have dipped. True, the bank’s stock price has been volatile and may well remain so, but that hasn’t stopped big hedge fund managers like Ken Fisher or Cliff Asness from adding to their holdings.
The bank’s fundamental signals of value are more than respectable. Its return on equity currently stands at nearly 10%, above the 8% or so at Goldman Sachs. And while that lags the 12.6% that Wells Fargo has achieved, JP Morgan Chase trades at a lower price-to-book value multiple. Veteran banking analyst Richard Bove, from his new perch at Rafferty Capital, is waxing bullish about bank stocks, predicting that bank earnings will go “straight up” from here, just as they did in the 14-year period between 1992 and 2006. Indeed, he predicts “all-time records hit in bank earnings” this year, as costs stay under control while revenues rise.
There are concerns, however. One question is what is happening to mortgage growth. Much of the recent boom has been due to refinancings, but as the months tick past, the odds that consumers will want to refinance yet again to capture a fraction of a percentage point of decline become slim. Increasingly, growth will have to come from new lending to new home buyers, and this is an altogether trickier matter. On the flip side, banks have been wary of lending – it’s a standoff that hovers over the economy and bank sector earnings. Then there’s a JPMorgan Chase-specific worry: regulators and legislators in two countries are once again scrutinizing the “London Whale” trading losses disclosed last spring, amidst reports that the different divisions of the bank ended up on the opposite side of the same trade and – according to some arguments – that the investment bank traders may have made it harder for JP Morgan as a whole to contain the losses. That kind of activity wasn’t disclosed in the lengthy internal report on the whole snafu that the bank released along with its earnings earlier this month; eventually, if these early reports are accurate, we will learn more and it is possible that the stock will react in some way to whatever news emerges.
Even though investors who have jumped into JP Morgan Chase this year may have missed the biggest part of its gains – as they so often do – the stock still seems to offer good value as well as significantly less risk than it did four years ago. This bank is more likely to grow slowly and steadily than to post blockbuster gains – but then, it’s also very unlikely to crash and burn.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at email@example.com.
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