Tuesday, 14 January 2014

Follow what Mr Dimon says and wait - a quick review of the JPM numbers

Time to review the two large banking sector earnings from JP Morgan (JPM) and Wells Fargo which were out earlier today.  Both shares ended very mildly.  In absolute terms that is fine, but on a day when the US indices were up a per cent or so...well that is a little disappointing.

So why the dullness?

Turning to JPM first the headlines were not bad at all...if you make the necessary adjustments.  Excluding the US$1.1bn or US$0.27 per share charge for legal expenses, Q4 EPS was US$1.40 versus consensus of  US$1.33, and the US$1.35 EPS generated a year ago.

The revenue line was down 1% year-on-year as consumer and community banking net income increases is offset by the mortgage business (originations down 54% year-on-year) and the investment banking sector (thanks fixed income). 

JPM is a sprawling empire, but the disclosures are pretty good - kudos to the investor relations team.  Outside the investment bank, the return on equity are pretty stable on the business undertaken.  It was calling out for a sum-of-the-parts analysis.  So I did one.

It is horribly simplistic but it gives a guide - and that's its value.  Sometimes a few sensible numbers can help uncover a core valuation.  So here are the divisional breakdowns...

Consumer/community banking US$11bn equity generating 28% RoE = 11*2.8 = US$30.8bn

Credit card/related (by similar methodology) 15.5 *2.6 = US$40.3bn

Mortgage division 19.5 * 1.1 = US$21.5bn

Investment bank 56.6 * 0.6 = US$33.9bn

Commercial division 13.55 * 2 = US$27bn

Asset Management 9 *2.5 = US$22.5bn

Add all this up and it comes to US$176bn versus the current market cap of US$217bn.  So far, so un-compelling. 

I feel as if I am being a bit too hard on the investment banking operations though.  A year ago they were generating 17% return on equity and even a blend of the H2 2013 performance would have given a double digit RoE. 

So if we double the value of this division this bumps the cumulative value to around US$210bn.  Still shy of the current share price...but getting closer.  Believe they can generate that 17% return on equity seen in Q4 2012 the cumulative value comes to around US$240bn.  That makes JPM 10%+ cheap against the prevailing share price. 

So JPM ends up being cheap or expensive depending on how you value the investment banking operations.  Given everything, maybe it is just easier to buy index futures - after all the level of the index is going to correlate pretty well with the divisions returns over time (even if fixed income overhung in this quarter due to specific tapering impacts).  If you don't fancy that US$55 and (especially) US$50 are share price levels of interest in my view. 

Funnily enough, I came across this comment from the CEO on Seeking Alpha:

"The stock price is a lot higher," says Jamie Dimon (JPM +0.8%) questioned on the bank's buybacks (was approved for $6B, but has repurchased only about $2.2B). We still think the stock is attractive, adds Dimon, but it's not the "extraordinary value" it was at $33. "We don't buy at just any price." It's "way optimistic" to assume that $6B will be filled out.
Sounds to me as if the big share buybacks are awaiting a lower level.  Given the broader markets are not without opportunity, a bit of patience is no bad thing. 


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