JPMorgan continued to strengthen its balance sheet during the fourth quarter. Its Tier 1 common ratio clocked in at 9.8%, and its Tier 3 ratio hit 7%. At quarter's end, the bank held $33 billion in credit reserves, with a loan-loss-coverage ratio of 4.5% of total loans. JPMorgan's global franchise is improving, with the retail financial-services and card-services divisions swinging from year-earlier losses to quarterly profits.
JPMorgan stands to benefit from every facet of economic growth, including higher consumer spending and a buoyant equity market. However, the recent quarterly performance was bolstered by a net decrease in credit reserves to $33 billion. Although JPMorgan's investment-banking revenue decreased 21% during the quarter, hurt by higher expenses, the bank ranked No. 1 for global fees.
In contrast, the bank's real-estate portfolio produced a quarterly net loss of $823 million, an improvement from the $1.7 billion loss in the year-earlier quarter but still a sign of weakness. JPMorgan boosted its allowance for loan losses on the Washington Mutual credit-impaired loan portfolio to $2.1 billion. It bought WaMu in 2008.
JPMorgan's diversified approach, particularly its retail and small-business exposure, is proving a superior strategy to the capital-markets exclusivity of Goldman Sachs. Further, loan modifications and amplified lending to small businesses have helped JPMorgan—which, like most too-big-to-fail institutions, accepted funds from the Troubled Asset Relief Program, or TARP—to restore its public image faster than peers.
However, a recent suit against the company alleging it complied in Bernard Madoff's Ponzi scheme has taken a PR toll. So has the admission that the bank wrongly overcharged thousands of military families, with members serving overseas, on their mortgages and improperly foreclosed on more than a dozen.
Despite the setbacks, a 50% increase in small-business lending during 2010, to $10 billion in provided credit, and an increase in domestic personnel by 8,000 have built some goodwill with the public.
Analysts' view of the company, as stated above, is overwhelmingly positive. Although revenue stagnated in the most recent quarter, the bank's profit spreads improved substantially. The gross margin widened from 60% to 78%, and the operating margin expanded from 33% to 54%. Return on assets, a measure of profitability, rose 24 basis points but remained modest at 0.8%. Return on equity stretched from 5.6% to 9.5%.
There are two key reasons, aside from an improving economic environment, that researchers believe JPMorgan's stock is due for a near-term boost: It is cheap, and the dividend is poised for growth. Currently, shares sell for a forward-earnings multiple of 8.5, a sales multiple of 1.6 and a cash-flow multiple of 8.7, 28%, 16% and 85% discounts to financial-services industry averages. The stock trades at a trailing earnings multiple of less than 12, representing a peer discount of 23% and a discount of 47% to the stock's five-year average earnings multiple.
Researchers predict, on average, that the dividend will more than triple during the next 12 months. It has fallen from a high of 38 cents, last paid in 2009, to just 5 cents, the payout that has been distributed for eight consecutive quarters.
Credit Suisse rates JPMorgan "outperform" and expects the stock to rise 25% to $58 in 2011. The Swiss bank stated, in a note Monday, that it believes JPMorgan "will be among the first to increase its dividend in the second quarter of 2011." This will make the stock more attractive not only to retirees seeking income investments but also to money managers with a mandate to buy dividend stocks.
At JPMorgan's investor day, being held today in New York, Credit Suisse is predicting a review of segment strategies with further disclosure on the impact of regulatory reform and capital standards. Given balance-sheet improvement, Credit Suisse expects further reserve drawdown in 2011, providing a catalyst for JPMorgan's stock, as the bank is able to acclimate to a normalized earnings environment faster than still-beleaguered peers such as Bank of America. Credit Suisse forecasts $4.70 of adjusted earnings in 2011, $5.35 in 2012 and $5.85 in 2013. It expects the second-quarter dividend to quintuple to 25 cents.