JPMorgan has been the world’s leading investment bank since December 2021 in terms of revenue market share. During this period, JPMorgan’s revenue accounted for 9.6% of global investment banking revenue. Goldman Sachs (NYSE: GS) followed, with a market share of 9%. The company earns its money from four main business sectors:
1. Consumer and Community Banking
2. Corporate and Investment Banking,
3. Commercial Banking
4. Assets and assets management
The company’s consumer and community banking income fell 2.3% year-on-year in the first quarter, as higher banking income was offset by lower home borrowing income (due to lower interest rates). There were also lower volumes of car loans due to shortages of vehicles. Revenue from corporate and investment banking fell 7.4% due to lower investment banking commissions and a $ 524 million loss in credit adjustments partly affected by the exposure to Russia.
Revenues from commercial banking remained almost stable, rising just 0.2% year-on-year. Revenue from Asset and Wealth Management showed a big boost, up 5.8% year-on-year, due to increased deposits and loans and higher management fees.
JPMorgan and many large existing banks face increasing competition from fintech startups around the world. In order to keep their finger on the pulse of the disturbances, they are on a spree of fintech acquisitions and partnerships since 2020, in addition to investing a staggering $ 12 billion a year in their own fintech offerings.
However, now JPMorgan is planning a radical transformation that will reorganize the company into a “collection of startup companies” with 25 Mini CEOs at the helm. They will focus on a product-focused approach, which includes rapid replication and simple software development techniques commonly used in technology companies.
According to Monika Panpaliya, Head of Global Technology at JPMorgan:
“Banks may be burdened with outdated systems and hierarchies, but our goal and we use a lot of data-based approaches to do that is to ensure that it is a customer-centric, flexible organization that we build on.”
This could be a real game changer for JPMorgan, as the real change requires a major overhaul.
The company recently announced earnings for the first quarter of 2022, which showed that profits had fallen by 42% as they smoothed out liquidity boost before the pandemic and added to its loan loss reserves due to exposure to Russia. Net interest income increased by 7.5% on an annual basis and 1.9% from the fourth quarter of 2021 due to improvements in loan balances and net returns. JPMorgans’ credit loss forecast added $ 1.46 billion, compared with a release of $ 4.16 billion in the first quarter of 2021. The company is paying a healthy dividend of 3.2%.
The return on tangible common stock was 16%, which was lower than in previous periods, but is in line with the long-term average. On a positive note for the company, net interest income accelerated by 7.6%, compared to an increase of just 2.6% in the fourth quarter of 2021. Net interest income is the difference between the income earned by a bank from its lending activities and interest paid by depositors.
Banks present their financial data very differently from other companies and often have a different wording of their income statement, so to avoid confusion, I did not provide any charts, as such charts would show high volatility that does not really reflect the business itself. For example, credit loss provisions often fluctuate with market risk, artificially altering the threshold.
Valuing a bank can be difficult, as its financial data includes a lot of customer deposit information and unique accounting tricks. In this case, I will use a very simple method: I got a 7.4% discount rate from Finbox and then I used this formula:
“1 / discount rate = justified price-to-earnings ratio”
“1 / 0.074 = 13.5”
The stock is currently trading at a rate of 11.5 futures based on analysts’ estimates for this year and thus seems to be undervalued.
JPMorgan continues to dominate the US banking market and with the largest market share in investment banking worldwide, it is expected to benefit from growing commissions in this area. Their profits look bad after adjusting to pre-pandemic levels and accumulating loan loss reserves due to Russia’s war in Ukraine.
However, now the stock seems undervalued by my estimates. I think a major transformation and the 25 Mini CEOs is a great idea and the only way to maintain their competitive edge in the long run.
This article first appeared on GuruFocus.