JPMorgan Chase & Co.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

JPMorgan Chase & Co. is a global financial services firm with operations spanning investment banking, consumer and community banking, commercial banking, and asset and wealth management.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

JPMorgan Chase & Co. operates a diversified business model across four main segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).

  • Consumer & Community Banking (CCB): This segment focuses on serving consumers through a range of banking and financial services, such as checking and savings accounts, mortgages, auto loans, and credit cards. CCB forms the largest source of revenues, benefiting from the large consumer base of the U.S. and the increasing usage of credit products.
  • Corporate & Investment Bank (CIB): CIB provides a range of investment banking products and services, including advisory, equity and debt underwriting, and trading. CIB’s earnings can be cyclical and significantly affected by market conditions, trading activities, and M&A deal activity.
  • Commercial Banking (CB): CB focuses on mid-sized and large corporations, offering a wide array of lending products, treasury services, and commercial real estate financing. CB’s performance is highly correlated with the economic growth and its performance is based on credit quality.
  • Asset & Wealth Management (AWM): AWM focuses on providing investment management and wealth solutions to institutions and high-net-worth individuals. Assets under management and performance-based fees contribute to this segment’s revenue.

Revenues Distribution

  • CCB is the largest revenue generator, followed by CIB, then CB and AWM.
  • Geographically, JPMorgan Chase derives a majority of its revenue from North America, followed by Europe, the Middle East, and Africa, and Asia-Pacific.

Industry Trends

  • Increasing digitization: There’s a growing trend towards digital banking and online financial services, which benefits technology-focused institutions. JPMorgan has been investing heavily in technology to improve their user experience and infrastructure.
  • Regulation: Heightened regulatory scrutiny, particularly since the 2008 financial crisis, has influenced risk management practices and compliance costs.
  • Interest rate environment: The interest rate landscape significantly influences net interest income which means that banks will need to re-invent business and funding strategies in times of different interest rates.
  • Economic cycles: Performance tends to fluctuate with broad economic cycles and consumer confidence.
  • Fintech Disruption: Fintech companies are increasingly taking market share in areas such as payments and online lending.

Competitive Landscape

  • The financial services industry is highly competitive. JPMorgan Chase faces competition from other major banks (like Bank of America, Citigroup, and Wells Fargo), investment banking firms (such as Goldman Sachs and Morgan Stanley), and increasingly, fintech companies.
  • The investment banking sector is highly competitive and a small number of firms tend to dominate these industries.
  • CCB is affected by competition within the US consumer banking market, credit cards, and non-bank lenders.

What Makes JPMorgan Chase Different?

JPMorgan Chase is one of the few “universal banks,” which means it has capabilities that span from consumer banking all the way to investment banking activities. This gives the bank diversification benefits and also economies of scale. JPMorgan has a substantial global presence, allowing it to tap into various different markets that are growing at different rates. They have a very strong brand name and reputation that instills trust, which helps in customer acquisition and in its relationships with other financial institutions. They are one of the biggest spenders on technology, giving them a major advantage when it comes to offering more options to their customers and lower costs. Their diversified approach to earnings means that their revenue stream is less correlated than most of their competitors, providing stability.

Financial Analysis

Historical Performance: In recent years, JPMorgan Chase has demonstrated resilience and has been achieving strong profitability and efficiency. Revenue Growth: Revenue growth has been positive, thanks to a mix of organic growth in the consumer base, higher revenues from investment banking, and strategic acquisitions. Profit Margins: Their net profit margin has fluctuated but has averaged approximately 20-30% over the past few years. ROIC: Their return on invested capital (ROIC) has been relatively stable, showing that the bank is maintaining profitability while efficiently deploying invested capital.

Latest Financials

  • Q1 2024: JPMorgan Chase reported strong financial results, exceeding analysts’ expectations. The bank reported record revenue. It has seen record deposits, and increased credit card spending by their customers. Average loans were up 7%. The bank’s CFO says it is difficult to predict growth in the next years due to uncertainty in the macroeconomic environment. They have seen an uptick in charge-offs in their card business, and they expect further increases in subsequent quarters, but that they are not concerned by these changes and that they are a normal part of a credit cycle.
  • Expense Management: Despite the record revenues, expense increases remain a point of concern for shareholders.

Assets & Liability Health

  • JPMorgan Chase has a massive balance sheet, which is closely tied to the health of the financial markets. The company has a lot of goodwill on their balance sheets as well.
  • The bank is heavily regulated in terms of what proportion of total assets needs to be in equity to safeguard customer deposits.
  • The bank has a diversified liability structure, with a large part of it consisting of customer deposits.
  • The bank reported in its latest earnings that they have $865B in high quality liquid assets, which indicates their readiness to pay obligations in the event of financial turmoil.
  • They currently have high liquidity, but also higher leverage.

Recent Controversies/Problems

  • Interest Rate Sensitivity: During times when interest rates are increasing, deposit costs might increase faster than interest income, shrinking net interest income.
  • Regulatory Scrutiny: JPMorgan Chase is highly exposed to regulatory changes. If there are increases in capital requirements, the bank might struggle to maintain and achieve its return targets. The bank’s reputation for being at the forefront of market activity often puts a bulls-eye on its back.
  • The Credit Cycle: Changes in the credit cycle can cause higher charge-offs and losses. They need to keep a well-diversified loan portfolio to lessen the risk.
  • Technological Disruption: Rapid changes in technology require constant vigilance and upgrades in IT infrastructure. If JPMorgan fails to keep up, it risks being overtaken by fintech startups.

Moat Analysis

Moat Rating: 3/5

  • Switching Costs: JPMorgan Chase has some level of switching costs in its consumer banking and wealth management arms. It can be a huge hassle to change bank accounts, especially for smaller businesses that use the full suite of services of the bank. In their investment banking sector they maintain relationships through close ties to their clients, which generates recurring revenue and business. These switching costs are moderate, not high. They are far less than those seen in software businesses, for example.
  • Brand Intangible Asset: JPMorgan Chase has a very strong reputation and brand recognition, providing trust that is important when it comes to finances. This brand allows them to attract and retain high net-worth clients as well. Though the name is a key advantage, brands are the easiest moat to erode.
  • Economies of Scale: They have scale in the US consumer banking sector and also in their investment banking arm, providing them with a cost advantage. Their enormous branch network allows them to offer loans and services at significantly lower rates than smaller banks. The investment banking arm can leverage its large teams of analysts and advisors to more efficiently work on projects.
  • Cost Advantage: They operate at a scale that provides them with advantages when it comes to costs and efficiency.
  • Network Effects: Network effects do not play a major part in their operations. The more customers a bank has, the less valuable each additional customer becomes.
  • Intangible Assets: They have proprietary systems and processes, however these are not a sustainable competitive advantage as their competitors can easily replicate it with enough resources.

Legitimate Risks to the Moat & Resilience:

  • Economic Slowdowns: Economic downturns can severely affect their lending business, resulting in lower revenues and higher loan defaults. This can reduce the bank’s profitability and potentially erode their equity.
  • Regulatory Changes: Increased regulations or compliance requirements may lead to higher costs and decreased profitability.
  • Fintech Disruption: Technological innovations from smaller, more agile fintech companies can steal market share from JPMorgan and erode existing value drivers.
  • Reputational Damage: If a company is involved in any kind of fraud, unethical practice, or any other type of scandal, it will drastically reduce its profitability and value, as customers and partners would have less trust in the company’s operations.

Understandability Rating

Understandability Rating: 4/5

  • The basic functions of each segment (consumer banking, investment banking, commercial banking and wealth management) is reasonably straightforward to understand.
  • However, the inner workings and dynamics of each sector are complex, especially investment banking and asset management. These are prone to regulatory complexity, dependence on global markets, and fluctuations caused by economic cycles.
  • Understanding the interaction and linkages between these sectors adds to the complexity.
  • The bank’s size and global nature add another layer of complexity to the understanding of its operations.
  • Overall the bank’s business operations are relatively easy to understand from a high level. It gets complicated when you try to understand all the moving parts and how they affect one another.

Balance Sheet Health Rating

Balance Sheet Health: 4/5

  • JPMorgan Chase’s large asset base and high liquidity are seen positively from a balance sheet health perspective.
  • JPMorgan’s high reliance on debt and leverage can be a concern, but they are well-capitalized and are subject to strict capital requirements.
  • The bank had to increase its capital buffers by billions of dollars during the recent crisis in order to mitigate risk, showing their willingness to be compliant with regulatory requirements.
  • The loan portfolio is spread across various sectors, limiting overall risk for any one given sector.
  • Their tangible assets tend to be relatively small compared to their debt load. Overall, the balance sheet can be considered healthy if you understand how banks work and their reliance on debt to fund their operations.