I’ve by no means been bearish on JPMorgan Chase (NYSE:JPM) long-term, however up to now few months, I have been apprehensive in regards to the sorts of issues the bank would possibly run into within the quick time period. In any case, America’s largest bank is a number one lender to the struggling oil trade and has an enormous bank card division, which might see losses rack up shortly in a recession. I’ve additionally expressed considerations about JPMorgan having the ability to keep its present dividend if financial circumstances proceed to deteriorate.
However after the bank reported a revenue of almost $4.7 billion within the second quarter, whereas setting apart billions to cowl loan losses, there isn’t a doubt in my thoughts that JPMorgan is an amazing bank stock to have proper now, and doubtless fairly low cost in the long run at lower than $100 per share. Bank of America (NYSE:BAC) is actually not a nasty stock and has fared fairly nicely through the coronavirus pandemic so far as a bank is worried, however what JPMorgan did within the second quarter was very particular for my part. This is why.
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A outstanding second quarter
On paper, JPMorgan and Bank of America carried out pretty equally within the second quarter. JPMorgan reported web earnings of almost $4.7 billion within the second quarter, down 51% from the second quarter of 2019 , whereas Bank of America reported web earnings of about $3.5 billion, down 52% from the second quarter of 2019 . Each stock costs are down by comparable ranges because the pandemic actually hit the markets in late February.
However JPMorgan generated $4.7 billion in income whereas setting apart roughly $10.5 billion to cowl potential loan losses . Not solely is that this most likely the largest quarterly provision that JPMorgan has ever taken, together with greater than any provision through the Nice Recession, it is greater than double the $5.1 billion provision Bank of America took within the quarter .
JPMorgan’s CEO Jamie Dimon has all the time talked about constructing a “fortress stability sheet,” and this quarter we actually noticed that in motion. Whereas the bank’s shopper and group banking, business, and company banking divisions posted losses within the quarter, the asset administration and company and funding bank divisions rode features that made the corporate worthwhile general. Particularly, the funding bank carried out phenomenally within the quarter, posting $16.Four billion in income, pushed by fixed-income market buying and selling income of $7.Three billion for an general revenue of almost $5.5 billion . That is precisely how the “fortress stability sheet” is meant to work — when markets are unstable, the funding bank picks up the slack, and when they’re secure, the buyer bank does extra of the heavy lifting.
The opposite factor to think about is that JPMorgan has now in-built about $19 billion of cash simply to cowl loan losses over the previous two quarters. Despite the fact that these losses have not materialized but, the bank has already taken loads of the ache to account for them. If issues don’t get as unhealthy because the bank is projecting, it might be capable of take among the cash out of the availability bucket down the road.
I’ve been involved about JPMorgan having the ability to keep its present dividend down the road if financial circumstances proceed to deteriorate at a worse clip than they’re now. The issue is that as a result of it is the most important bank within the nation, JPMorgan continues to have the next regulatory burden even when it seems to be performing nicely.
For example, following the Federal Reserve’s stress check outcomes, JPMorgan introduced that it must keep the next widespread fairness tier 1 (CET1) capital ratio, a metric carefully watched by regulators that measures a bank’s core capital as a proportion of its risk-weighted belongings. Its regulatory minimal will possible enhance from a 10.5% CET1 ratio to 11.3% in October, whereas Bank of America’s minimal CET1 ratio will stay at 9.5% . If the CET1 ratio falls beneath a bank’s required minimal, that bank is restricted to paying out capital distributions equal to 60% of eligible retained earnings, which makes a dividend minimize extra of a severe consideration.
With JPMorgan’s CET1 ratio at 12.4% on the finish of the second quarter , it solely has 1.1% to fall till it brushes up towards that minimal. In the meantime, Bank of America’s present CET1 ended the second quarter at 11.6% , leaving it with greater than 2% to fall earlier than brushing up towards its regulatory minimal.
For that reason, I do see Bank of America’s dividend being a lot safer proper now, however I nonetheless suppose JPMorgan is in strong form. To begin with, the bank nonetheless would possibly be capable of pay its dividend if its CET1 ratio fell barely beneath 11.3%, and second, there is not any indication that ratio will get that low once more. Final quarter, its CET1 ratio fell to 11.5%, however that was after enterprise prospects on the bank drew down an unprecedented $50 billion in revolving traces of credit score, considerably rising the bank’s risk-weighted belongings and due to this fact dropping its CET1 ratio .
Once more, I wish to reiterate that Bank of America just isn’t a nasty stock to personal long-term, however I used to be actually impressed with JPMorgan’s means to generate $4.7 billion in revenue, whereas setting apart a lot cash to cowl potential loan losses. Because it did within the Nice Recession, the bank continues to carry out nicely in occasions of stress. Whereas the dividend may be at extra threat than Bank of America’s, even when there was a minimize, it might possible solely be short-term, and I nonetheless suppose JPMorgan is in place to keep up its present dividend degree.