Fisher College of Business
The Ohio State University
Columbus, Ohio
FISHER SIM PROGRAM
Equity Research
Initiating of Coverage:
S&P 500 Ticker:
Rating
Current Price – 05/29/09
Target Price - 12 Month
% Change
JPMorgan Chase & Co. (JPM)
North America, United States
Financial Services
Diversified Financial Services
INITIATING COVERAGE WITH A BUY RATING: Fisher SIM Program is initiating
coverage of JPMorgan Chase & Co. with a BUY rating, projecting a 12 month target price of
$43.95, 21.72% above the current price of $36.11. The 2009 EPS estimate is $1.45, in-line with
consensus. The 2010 EPS estimate is $2.73, 3% above consensus of $2.66.
Earnings Per Share (EPS)
Diluted Earnings Per Share
% Change
Consensus Estimate
Number of Analysts
Low Estimate
High Estimate
Year Ago EPS
2009E
$1.45
6%
$1.45
18
$0.95
$1.82
$1.37
2010E
$2.73
88%
$2.66
17
$1.00
$3.50
$1.46
2011E
$4.61
69%
SUSTAINABLITY
JPMorgan Chase & Co. will continue to be challenged by rising credit costs, increasing unemployment
and threat of government regulation in the near-term. However, sufficient capital, strong liquidity,
superior risk controls and diversification of revenue have positioned JPM to earn through this
challenging operating environment.
Fundamental Strengths
ƒ Sufficient Capital: JPM has adequate credit loss reserves based on the current credit environment,
with a Tier 1 capital ratio of 11.3% at the end of Q109.
ƒ Strong Liquidity: The company has total deposits of $1.0T and the firm expects to continue to
leverage the existing deposit base to generate positive account growth and cross-sell.
ƒ Superior Risk Controls: JPM has been proactive in reducing credit risk exposure across all lines
of business and has benefited from “flight to quality” due to its strong balance sheet.
ƒ Diversification of Revenue: JPM has been able to rely on its more stable and less volatile lines of
business during this economic downturn.
Fundamental Weaknesses
ƒ Increasing Credit Exposure in Consumer Lending: Consumer lending losses, specifically in
home equity, prime and sub-prime mortgages, are a major concern for JPM since the losses are
highly correlated to rises in unemployment and declines in home prices.
ƒ Rising Credit Costs in Commercial Bank: Commercial lending is expected to have higher credit
costs in commercial construction and real estate in 2009 and into 2010.
ƒ Incremental Deterioration in Credit Card: Credit Card Services is expected to continue to
experience increasing net charge-offs, resulting from rising unemployment.
ƒ Government Regulation: In the near-term, TARP and the Unfair and Deceptive Acts or Practice
rules (UDAP), will continue to challenge JPM.
GROWTH
The significant investment JPM has made to increase its core businesses and expand market share will
prove to offer stability in 2009 and drive significant growth in 2010 and 2011.
ƒ Synergy of Bear Stearns: This analyst expects the addition of Bear Stearns to add over $1.0B of
annual earnings and earnings growth will compound with stabilization of the market.
ƒ Expanded Retail Footprint: The expanded retail footprint resulting from the WaMu acquisition is
projected to increasing product/service cross-sell through the WaMu branches, specifically in
investment products and loan originations, over the next 12 months.
ƒ Grow Market Share: JPM is positioned to acquire more failed banks to increase market share
since failed banks do not count toward the 10% national deposit cap.
May, 29 2009
JPM
BUY
$36.11
$43.95
21.72%
Fund Manager:
Royce West, CFA
Research Analyst:
Nick V. Ferrugia
614.560.5531
ferrugia.1@osu.edu
Consensus Target Price
Mean
$41.07
Median
$41.00
High
$60.00
Low
$28.00
# Analysts
14
Equity Summary
52wk
$14.96-$50.63
Volume
89,842,955
Avg. Vol..
102,552,000
Mrkt. Cap.
$135.74B
P/E (ttm)
32.01
EPS (ttm)
1.128
Div & Yld.
0.20 (0.50%)
http://finance.yahoo.com
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Table of Contents
Company Analysis…………………………………………………………………………………………………………..3
Lines of Business Analysis……………...…………………………………………………………………………………..5
Investment Banking (IB)…………………………………………………………………………………………….5
Retail Financial Services (RFS)……………………………………………………………………………………..7
Credit Card Services (CCS) ………………………………………………………………… ……………………..9
Commercial Banking (CB).……………………………………………………………………………………......11
Treasury & Securities Services (TSS) ……………………………………………………………………………..12
Asset Management (AM) ………………………………………………………………………………………….14
Financial Sector Outlook………………………………………………………………………………………... ……….15
Diversified Financial Services Outlook………… …………………………………………………………………….....16
Performance Analysis………………………………………………….……………………………………………….....16
Historical Performance………………………………………….……………………………………………….....16
Regression Model……………………………………………….……………………………………………….....18
Technical Assessment……………………………………………………………………………..…………….....18
Ratio Valuation………………………………………….………………………………………...…………….....19
Target Price Analysis………..………………………………….………………………………………...…………….....20
Absolute Ratio Valuation Model………….…………….………………………………………...…………….....20
Discounted Cash Flow Model (DCF).…….…………….………………………………………...…………….....21
Investment Thesis…….……………………………...………….………………………………………...…………….....22
Appendix…….………………………………..……...………….………………………………………...…………….....23
Ratio Valuation Methodology………..……...………….………………………………………...…………….....23
Equity Rating………..……...…………………………...………………………………………...…………….....24
Acronyms………..……...………….……………………………………………………………...…………….....24
Analyst Notes………..……...…………………………...………………………………………...…………….....24
Figures and Charts………..……...………………...…….………………………………………...…………...25-29
Page 2 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Company Analysis
JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2 trillion and operates in more than
60 countries. JPMorgan Chase & Co., through its subsidiaries, provides a wide range of financial services worldwide.
The company operates primarily through six lines of business: Investment Bank (IB), Retail Financial Services (RFS),
Card Services (CSS), Commercial Banking (CB), Treasury and Securities Services (TSS), and Asset Management
(AM).
CEO: Jamie Dimon
Rank 2009: Second largest U.S. bank
Performance:
Summary
JPMorgan Chase generated net revenue of $72.8B in 2008, a decrease of 3% from the $74.2B reported in
2008
2007. JPM reported net income of $5.6B in 2008, a decline of 64% from the $15B reported in 2007. The
ROE of the company declined from 13% to 4% YoY. JPM net profit margin decreased from 21% to 8%
YoY. Commercial Banking, Retail Financial Services, Card Services accounted for 62% of revenues in
2008, Investment Banking accounted for 17%, and Asset Management and Treasury and Securities Services
accounted for 22%.
JPMorgan Chase generated revenue of $25B in Q109, an increase of 48% from the $16.9B reported in
Q1 09
Q108. JPM reported net income of $2.1B this quarter, a decline of 10% from the $2.4B reported in Q108.
Compared to the prior quarter, JPM revenue increased $7.8B (48%) from $17.2B and net income increase
$2.8B from -$623MM. This quarter the business reported a ROE of 5% a significant increase from -3%
compared to prior quarter and decline from 7.7% YoY. Investment Banking, Retail Financial Services,
Card Services accounted for 82% of revenues in 2008, Commercial Banking, Asset Management and
Treasury and Securities Services accounted for 18%.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
Outlook
Sustainability: JPMorgan Chase & Co has been proved to be one of the stronger banks during this economic downturn
by maintaining financial power though sufficient capital, strong liquidity, great risk management, and diversification of
revenue. Currently, each of JPM’s primary lines of business is now ranked as one of the top three leaders in its respective
industry. Although, JPM is not immune from a possible downturn in the economy, the company is positioned to
fundamentally outperform its peers in the near future.
JPM had a Tier 1 capital ratio of 11.3% at the end of Q109. The Tier 1 capital ratio of JPM is still strong at 9.2%,
excluding TARP. The firm also has $28B of credit reserves. In February 2009, JPM cut the company’s dividend from
$0.38 per share to $0.05 per share. The purpose of reducing the dividend was to strengthen the capital ratio of the firm,
allowing JPM to prepare for the worst case economic conditions by saving an estimated $5B annually. The results of the
bank "stress tests” showed JPM was one of the 9 of 19 banks that did not need to raise capital. The “stress test” results
show JPM compared to its peers is sufficiently capitalized, with adequate credit loss reserves based on the current credit
environment.
JPM has strong liquidity, with deposits to loans ratio of 135%. JPM has total deposits of $1.0T and the firm
expects to continue to leverage the existing deposit base to generate positive account growth and cross-sell.
The conservative risk management of JPM has proven to be a competitive advantage during this recession. The
strong balance sheet perception has benefited JPM from “flight to quality” in nearly all business units and this trend is
expected to continue though 2009. JPM has been proactive at reduce its heritage assets risk exposure across all the lines of
business, although JPM continues to lend to creditworthy customers. Additionally, JPM has been able to focus on growing
core businesses rather than dealing with capital raising, business reductions and large employee layoffs.
The company has benefited from the diversification of it revenue. None of JPM’s six lines of business in 2008
account for more than 1/3 of the firm’s total revenue. AM and TSS are expected to continue to be a stable source of net
Page 3 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
income in the near future. Additionally, the JPM continues to increase cross-sell across all lines of businesses, which is
expected drive organic revenue growth across the firm.
JPM is confident in its ability to pay back the $25B TARP capital without the need to raise capital due to its
strong pre-provision earnings, sufficient credit loss reserves and a solid capital position. Based on the current politics
surrounding TARP and statements by JPM management, this analyst believes that JPM will pay back the TARP early
Q309. JPM paying back the TARP early will strengthen the already fortress brand and will significantly reduce JPM’s
preferred dividends. Additionally, JPM will be able to eliminate compensation scrutiny allowing the firm to retain and
attract top talent.
JPM will continue to be challenge by rising unemployment and deterioration of the credit market through 2009
and into 2010. Consumer and commercial lending and the credit card line of business are expected to be significantly
impacted by increased credit costs. Consumer lending losses, specifically in home equity, prime and subprime mortgages,
are a major concern for JPM, since the losses are highly correlated to rises in unemployment and declines in home prices.
Commercial lending is expected to have higher credit costs in commercial construction and real estate over the next year.
Construction and development (C&D) loans are expected to be the main driver of credit costs in the Commercial Bank in
the near future; although, C&D only accounts for approximately 10% of loans. The real estate lending operation will
continue to be an area of concern for the next two year because of its $63B in credit exposure. CCS is expected to
continue to experience increasing net charge-offs driven by an increase in +30 and +90 day delinquencies, resulting from
rising unemployment.
The ROE of JPM has continued to decrease over the last 5 quarters to a 20 year low of 2.2. Although, this analyst
believes this ratio should start to increase early 2010, but continued decrease could indicate deterioration of sustainability
of earning. Further decrease of ROE could be a result of significant weakening of the credit market and/or the expected
earnings growth from the WaMU and Bear Stearns acquisitions being less than initially forecasted.
Growth: During a time when the majority of JPM’s peers were struggling to survive, JPM was building its market share
and strengthening its core business by acquiring distressed companies from the U.S government. The recent acquisition
of distressed companies has established the groundwork for future growth.
On May 30, 2008, JPM acquired Bear Stearns. Bear Stearns contributed an established fixed income trading
business, a strong commodities trading platform, and a profitable prime brokerage business. JPM acquired $370B total
asset from Bear Stearns, which JPM has effectively managed the legacy risk exposure. In the option of this analyst, this
acquisition has made JPM too strong to ignore in investment banking, which should enable the firm to dictate better terms
when allocating its capital to risk initiatives and continue to capitalize on “flight to quality”. JPM expects the addition of
Bear Stearns to add approximately $1.0B of annual earnings to the company. This analyst expects the addition of Bear
Stearns to add over $1.0B of annual earnings and earnings growth will compound with stabilization of the market. This
option is based on JPM has underestimated the value of the company’s stability to acquire customers and benefit of Bear
Stearns fixed income trading.
In September 2008, JPM acquired the deposits, assets and certain liabilities of Washington Mutual (WaMu) for
approximately $1.9B. The WaMu acquisition expanded retail, card, and commercial businesses unit footprint to
California, Oregon, Washington, Idaho, Nevada, Georgia, and Florida. The retail business of JPM expanded to more than
5,000 branches in 23 states, adding 7,200 bankers and increasing ATMs to 14,500. The WaMu acquisitions cost saves are
now expected to be about $2B, a positive adjustment form the original $1.5B estimate. The expanded retail footprint is
forecasted to increasing product/service cross-sell through the WaMu branches, specifically in investment products and
loan originations, over the next 12 months.
In view of this analyst, JPM is primed to acquire more failed banks to increase market share since they will not
count toward the 10% national deposit cap. Additionally, JPM will have completed the WaMu conversion mid Q409,
freeing up proven and efficient conversion resources.
In summary, the aggressive investment JPM has made to increase its core businesses and expand market share
will prove to provide stability in 2009 and drive significant growth in 2010 and 2011.
Profitability: In 2009, this analyst expects JPM to be slightly less profitable than 2008. Although, the future revenue of
JPM will continue to have significant growth, the 2009 earning will be challenged by a volatile economic environment,
Page 4 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
rising unemployment and continued credit losses. JPM is forecasted start recording positive earnings growth in 2010 and
2011, based on the assumption the economy and unemployment will stabilize reducing credit losses. [Figure.1, 1.A]
Figure.1
JPM (in $millions)
Total Net Revenue
Net Income (loss)
YoY % Change
% Operating Margin
Net Profit Margin
2011E
111,606
17,251
69%
23%
15%
2010E
102,513
10,228
90%
15%
10%
2009E
95,751
5,377
-4%
8%
6%
2,008
67,252
5,605
-64%
4%
8%
2,007
71,372
15,365
6%
32%
22%
2,006
61,999
14,444
32%
23%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Lines of Business Analysis
Investment Bank (IB)
Business Head: Steve Black & Bill Winters
Overview: The Investment Bank segment offers investment banking products and services. The segment advises on
corporate strategy and structure, raises capital in equity and debt markets, risk management, market-making in cash
securities and derivative instruments, and research. IB serves corporations, financial institutions, governments, and
institutional investors.
Current Rank: JPM ranked #1 in global debt and equity & equity-related capital raising1. JPM ranked #1 in Global Fees
for 2008 with 8.3%2 market share. Additionally, IB ranked #2 in announced global M&A3.
1
Source of Data: Thomson Reuters
Source of Data: Dealogic
3
Source of Data: JPM Investor Day Feb 26, 2009
2
Performance:
Summary
In 2008, IB revenue decreased 33% and
2008
percentage of total revenue decreased from
24% to 17% YoY. IB reported a net income
loss of $1.2B (-137% YoY) with an ROE of
-5%. IB is JPM’s largest business in terms
of allocated capital with $33B at year-end
2008, or about 25% of the firm-wide total of
$129B. IB profit margin decreased from
17% in 2007 to 10% in 2008. Revenue
composition was IB fees (48%), equities
markets (30%), fixed income markets (16%)
and credit portfolio (6%).
IB net revenue increased from -$302MM to
Q1 09
$8.3B in Q109. On a YoY basis, net revenue
increased $5.3B compared to Q108. IB
reported net income of $1.6B, an increase
$4.0B compared to the prior quarter. On a
YoY basis, IB net income increased $1.7B
compared to Q108.
Key Drivers
IB net income, excluding impact from the Bear Stearns
merger, would have been modestly positive in 2008. Fixed
income market trading and declining credit portfolio
contributed to the majority of the loss, resulting in over $10B
in write-downs during 2008. Fixed income trading revenues
declined 69% year-over-year to $2B. Credit portfolio
revenues fell 44% over the same comparisons to $739MM.
Although, IB experienced record revenue in rates and FX,
emerging markets and credit trading. Additionally, client
revenue increased 40% YoY due to customer “flight to
quality”.
The strong IB performance was driven by principle
transaction, which increased $9.6B compared to prior
quarter. Principle transaction increase was led by fixed
income trading posting revenue of $4.9B, as a result of
strong performance in credit, emerging markets and currency
trading. Additionally, revenue from structured liabilities
increased due to the widening of the credit spread on
structured liabilities. Expense increased 87% compared to
Q108, primarily because higher performance-based
Page 5 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
compensation expense on record revenue and the impact of
the Bear Stearns merger. IB fees increased 14% as a result of
strong debt underwriting fees offset by declines in advisory
and equity underwriting. Provision for credit losses increased
96% QoQ to $1.2B. Higher-risk asset mark-down totaled
$711MM in markdowns due to leveraged lending exposure.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
Outlook
Sustainability: JPMorgan continues to be ranked one of the top investment banks. Historically, IB trading revenue has
been volatile and unpredictable, especially over the past year. Management has expressed that core branch deposits and a
diversified business will allow them to take more calculated trading risk in the future.
Fixed Income trading was the primary revenue driver in Q109; however, IB demonstrated solid diversification by
increased revenue in other divisions like equity markets and investment banking. IB management expressed concern that
decreasing credit spreads will negatively impact trading revenue, but the diversification of the business provides some
stability to future earnings.
In Q109, the majority of the increase in equity trading was due to hedged positions, but its total trading only
increased 3% compared to Q108. This indicates the increase in revenue was a result of an effective trading strategy, not
aggressive trading gains. However, JPM relies on hedging to limit portfolio losses. If the hedges do not perform as
expected, the firm will be exposed to losses.
Derivatives trading has consistently generated a 20% ROE for JPM and is an important area of IB because it
represents about 1/3 of the IB’s revenue and about 1/3 of its capital. JPM management has stated the firm remains
committed to its derivatives franchise, and this analyst expects derivative trading will maintain a 20% ROE in the nearterm.
IB has taken proactive steps to reduce its heritage assets risk exposure in the future. In the opinion of the this
analyst, in the next 12 months the strong revenues of IB will be partially offset by higher credit costs as the economy
weakens and mortgage markets deteriorate. The segment indicates future risk exposure by increasing provisions of credit
loss $592MM (96%) QoQ to $1.2B. In the opinion of this analyst, in the near-term, IB is positioned to fight through the
threat of a declining credit environment.
Growth: The acquisition of Bear Stearns contributed an established fixed income trading business, a strong commodities
trading platform, and a profitable prime brokerage. This addition strengthened IB and positioned it for substantial longterm growth. JPM expect the businesses addition of Bear Stearns to add approximately $1B of annual earnings to the
company. “flight to quality” doubled the number of +$1B AUM clients in Equity Prime Brokerage from June to
December in 2008. Analysis indicates similar growth trend will continue through the next 12 months.
Profitability: This analyst forecasts IB to record strong earnings in 2009, after a significant loss in 2008. The business is
expected to record the highest net income of all lines of business in 2009, although move to second behind RFS in 2010
and 2011. In the next 12 months, the primary drivers of increased revenue appear to be principle transaction; specifically,
fixed income trading, “flight to quality”, and narrowing, though still profitable, credit spreads. Challenges still remain in a
deteriorated credit market, resulting in increased provisions of losses in 2009. Additionally, Non-interest expense is
expected to spike due to an increase in compensation costs related to better performance. The revenue diversification, risk
management, and sustainable investment strategies indicate IB has the foundation to generate strong profits over the next
few years. [Figure.2, 2.A]
Figure.2
Investment Banking (in $millions)
2011E
2010E
2009E
2,008
2,007
2,006
Total Net Revenue
30,030
27,770
26,384
12,214
18,170
18,833
Net Income (loss)
3,543
2,356
1,483
(1,175)
3,139
3,674
YoY % Change
50%
59%
-137%
-15%
% Operating Margin
19%
14%
9%
-29%
25%
31%
Net Profit Margin
12%
8%
6%
-10%
17%
20%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Page 6 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Retail Financial Services (RFS)
Business Head: Charlie Scharf
Overview: JPMorgan Chase & Co. is one of the largest financial services firms in the U.S., the company has over 14,000
ATMs and more than 5,000 bank branches operating in 23 states. The Retail Financial Services segment provides regional
banking services, including consumer and business banking, home equity lending, and education lending, as well as offers
mortgage banking and auto finance services.
Rank: JPM ranked #3 in the U.S. in deposits4 with 10.2% market share behind BAC (11.3%) and WFC (11.2%). JPM
ranks #2 in home equity originations5 and #3 in mortgage origination/servicing6. Additionally, JPM ranked #3 in branches
and #2 in ATMs7.
Performance:
Summary
In 2008, RFS revenue increased 36% and
2008
percentage of total revenue increased from
23% to 32% YOY. RFS reported net
income of $880MM (-70% YOY) with an
ROE of 5%. RFS profit margin decreased
from 17% in 2007, to 4% in 2008. Revenue
composition was home equity (41%), prime
mortgage (25%), option ARM (11%), auto
(12%), sub-prime mortgage (6%), and
student loans (5%).
Retail Financial Services net revenue
Q1 09
increased $151MM (2%) to $8.8B compared
to the prior quarter. On a YoY basis, net
revenue increased $4.1B (85%) compared to
Q108. RFS reported net income of
$474MM, a decrease of $150MM (-0.24%)
compared to the prior quarter. On a YoY
basis, RFS net income increased $785MM
compared to Q108.
Key Drivers
Retail Banking (RB), which includes Consumer Banking
and Business Banking, performed well recording $3B in
revenue. Consumer Lending (CL), which includes the
Mortgage, Home Equity, Student Loan and Auto Finance
businesses, reported a loss of $2.1B. Loss was driven by a
274% increase to $9.5B in the provision for credit losses,
primarily in the home lending businesses. Decrease of
home prices, the effects of past poor underwriting
standards, and the deepening recession increased mortgage
losses.
JPM management contributes the strong YoY revenue
increase to “flight to quality”, WaMu transaction, wider
deposit spreads and increased deposit-related fees. Analysis
shows RFS Q109 revenue was positively impacted by a
$1B gain related to Mortgage Servicing Rights (MSR).
Despite Consumer Lending recording the gain related to
MSR, mortgage fees and related income decreased
$329MM (-17%) to $1.6B. The expansion of the JPM retail
footprint and “flight to quality” have assisted branch sales
this quarter. Branch investment sales (11%), mortgage
(87%), and auto (99%) originations all had double digit
growth compared to prior quarter. In Q109, RFS continues
to be negatively impacted by Consumer Lending,
specifically the mortgage portfolio. In this quarter, net
charge-offs and nonperforming assets significantly
increased for home equity, prime and subprime
mortgages. Additionally, provision for credit losses
increased $301MM (8%) to $3.9B QoQ, reflecting concerns
of a weakening credit environment.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
4
Source of Data: SNL Corporation; market share data as of June 2008, updated for subsequent acquisitions for all banks through January 2009. Includes deposits in
domestic offices (50 states and D.C.), Puerto Rico and U.S. Territories only and non-retail branches are not included
5
Source of Data: Inside Mortgage Finance, 3Q08
6
Source of Data: Inside Mortgage Finance, 4Q08
7
Source of Data: JPM 2009 Letter to Shareholders
Page 7 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Outlook
Sustainability: RFS has consistently taken the steps to ensure long-term success. RFS strategy focuses on branch-based
profitability, operates from one platform across the entire network and a simple compensation structure that rewards good
service and sales. The business continues to be dedicated to providing excellent customer service, building a strong brand,
investing in new technology, hiring top talent, managing risk and expanding market share. The acquisition of WaMu will
assist RFS to maintain long-term success by expanding the RFS branch footprint into higher population growth areas in
the West and Florida. The WaMu acquisition extended the branch network of JPM to more than 5,000 branches in 23
states, adding 7,200 bankers and increasing ATMs to 14,500. RFS checking account growth has been strong in the past,
but reduction of the attrition rate is a key to future success. The JPM Q109 Investors Presentation stated RFS was able
to quickly stabilize WaMu's deposit base at the level when it was acquired. Even though JPM immediately re-priced the
WaMu deposit base, lower interest rates, and deposits steadied at $124B since the acquisition. Additionally, RFS has
implemented an aggressive branch conversion and consolidation strategy to minimize negative customer impact. All
branch systems conversions are scheduled to be completed in three phases, with all phases completed by the end of 2009.
Overall, RFS plans to invest $750MM in sales people, facilities and marketing to maintain and grow the WaMu footprint.
Looking forward, RFS will continue to be challenged with credit losses driven by unemployment and declining
home prices. RFS has been diligent in increasing the segments loan loss reserves, with LLR/Total Loans ratio of 5.20%
and LLR/NPL ratio of 252% at the end of Q109.
Consumer lending losses, specifically in home equity, prime and subprime mortgages, are major concerns for the
business segment. This analyst believes net charge-offs and nonperforming assets will significantly increase in these
Consumer lending areas based on guidance provided by RFS. Significant home equity losses will continue over the next
year primarily driven by high CLTV (Combined Loan to Value) loans, a result of declining home prices. Although, this
analyst believes home prices should start to stabilize late 2009, as unemployment continues to rise, the prime and
subprime mortgage delinquencies and foreclosures will continue to steadily increase over the next year.
In conclusion, RFS has established the foundation for long-term success, but the expected future losses in the
mortgage portfolio, due to the struggling economy, is going to challenge earnings in 2009 and 2010.
Growth: This analyst expects RFS to achieve near-term growth market share through increased deposits, cross-sell and
lending. However, the growth will be partially off-set by substantial credit losses in home equity, prime and subprime
mortgage. The expansion of the JPM retail footprint and “flight to quality” will continue to be the driving factors in
growth of deposits and branch sales. Additionally, JPM sales strategy places more emphasis on cross-sell than did WaMu,
which will allow RFS to capitalize on the undersold WaMu portfolio and footprint. RFS branch footprint still lacks
coverage in the Southeast and the upper Midwest. The current banking environment is ideal for JPM to pursue more
acquisitions in 2010, since it will need to acquire failed banks as the deposits do not count toward the 10% national
deposit cap. If the right opportunity is presented, JPM could acquire a regional bank located in one of these areas. This
analyst believes Regions banks would be a profitable acquisition for JPM.
Profitability: RFS management has provided earnings guidance for 2009 that has been considered when forecasting the
segments future results. In 2009, this analyst expects RFS net income to range from $600MM to1.1B. In the near-term,
RFS net income will be challenged by credit losses in consumer and small business lending, but as these losses recede, by
mid 2010 the line of business will start to record substantial earnings. This analyst had forecasted RFS to record the
highest income of all the line of business in 2010 and 2011. [Figure.3, 3.A]
Guidance 2009:
• Home Equity - quarterly losses could reach $1.4B
• Prime Mortgage - quarterly losses could reach $500MM
• Subprime Mortgage - quarterly losses could reach $475MM
Page 8 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.3
Retail Financial Services (in $millions)
Total Net Revenue
Net Income (loss)
2011E
36,912
4,581
2010E
34,918
2,783
2009E
32,673
1,010
2008
23,520
880
2007
17,305
2,925
2006
14,825
3,213
YoY % Change
65%
175%
15%
-70%
-9%
% Operating Margin
20%
13%
5%
7%
28%
36%
Net Profit Margin
12%
8%
3%
4%
17%
22%
Credit Card Services (CCS)
Business head: Gordon Smith
Overview: The Credit Card Services segment issues credit cards, and general-purpose cards to individual consumers,
small businesses and partner organizations.
Rank: JPM is #1 in credit cards outstanding with 24% market share8 and #2 U.S. merchant acquirer (by acquiring
volumes)8. Chase CCS is the #1 U.S. Visa issuer (by # of cards) and #2 U.S. MasterCard issuer (by # of cards)8.
Performance:
Summary
In 2008, CCS revenue increased 8% and
2008
percentage of total revenue increased from
20% to 23% YOY. CCS reported net
income of $780MM (-73% YOY) with an
ROE of 5%. CCS profit margin decreased
from 19% in 2007 to 5% in 2008.
Q1 09
CCS net revenue decreased $-221MM
(5.0%) to $5.1B compared to the prior
quarter. On a YoY basis, net revenue
increased $1.2B (31%) compared to Q108.
CCS reported net income of $-547MM a
decrease of $-176MM (47%) compared to
the prior quarter. On a YoY basis, CCS net
income decreased $-1.2B compared to Q108.
Drivers
Credit loss provisions spiked to $10B for 2008, 76% higher
YOY. Home price depreciation was the biggest driver of
credit losses in the CCS portfolio until mid 2008 when
unemployment became a major factor. California and
Florida made up 19% of credit exposures in 2008. Chargeoffs increased 48% YOY from $5.5B in 2007 to $8.2B in
2008. JPM stated CCS has a less than 1:1 relationship
between the NCO rate and unemployment in 2008. In
2008, JPM added 14.9MM new credit card accounts and
extended more than $84B in new credit.
Revenue increased 31% YOY and expense 6% YOY due to
an increased QoQ as a result of the WaMu transaction.
During the quarter, credit loss reserves increased to 9.7% of
loans from the 7.3% prior quarter, which reflects the
struggling credit environment. Additionally, weak
economy and rising unemployment has caused the +30 day
delinquency rate to increase 1.19% to 6.16% and the +90
day delinquency rate to increase 0 .88% to 3.22%. Credit
card volume fell to $94B, a decline of $40B (-30%). Also,
total transactions decreased $800MM (-16%) to $4.1B.
CCS only opened 2.2MM new accounts, a decrease of
2MM (-49%) compared to 4.3MM booked in the prior
quarter.
Source of Data: JPM 2009 Annual Report, and JPM 1Q09 Earnings Transcript.
Outlook
Sustainability: Credit Card Services core vision strategy has not changed over the last few years. The business is
managed by three pillars: build a strong differentiated brand, targeted and propriety rewards, and quality customer
experience. This strategy has built a competitive strategy, and combined with the risk management of JPM, will enable
long-term success.
8
Source of Data: NilsonReports. Merchant Acquirer data adjusted for disolution of First Data JVS
Page 9 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
In the near-term, sustainability of CCS earnings are threatened by the struggling economy, higher unemployment,
past relaxed credit standards and government regulation. The weak economy and rising unemployment has generated
lower consumer confidence, resulting in considerable declines in credit card sales, transactions and spending. As expected
during a recession credit card transactions and spending will decrease because of less consumer discretionary income,
however, for the first time in history check card purchases are threatening to surpass credit card purchases9. JPM will need
to watch this trend carefully, as with the acquisition of WaMu, JPM has become the largest credit card issuer in the U.S,
with more than 168MM cards.
CCS is experiencing a significant rise in +30 day delinquency and +90 day delinquency, contributing the increase
to the weak economy and rising unemployment. CCS has stated that net charge-offs have a slightly less than 1:1
relationship to unemployment. Unemployment reached 8.5% at the end of Q109. Based on the stated relationship between
the NCO rate and unemployment, the 7% NCO rate reported by CSS in Q109 appears to support the analysis provided by
CCS. The Fed projected that the unemployment rate will rise to between 9.2% and 9.6% by the end of 2009. This
projection appears to be justified since historically unemployment starts to stabilize or decline around six months after the
economy shows sign of stability, trending toward positive growth. The opinion of this analyst is unemployment will
continue to rise until mid 2010, since the future of the economy is still uncertain and GDP continues to decline.
Additionally, a significant number of large U.S. employers are enacting hiring freezes and expect limited job creation in
the future. If the unemployment rate reaches above 9.5%, which is highly probable, this analyst believes CSS net chargeoffs will exceed the 1:1 relationship. Also, the longer the unemployment rate continues to increase, the more likely the
NCO will surpass the current relationship and delinquency rates will decrease, causing CCS to build higher provisions of
loss reserves resulting in larger losses.
CCS had been proactive in minimizing losses by implementing the proper steps to position it for long-term
success. CCS has tightened underwriting based on leading economic indicators, and continues to lend to customers that
are credit worthy. CCS is very active in reducing its contingent liabilities by closing inactive accounts. Additionally, the
segment has increased collection efforts and intensity, while expanding the use of its flexible payment programs. CCS
had to be diligent on this front since the segment, as did the industry, relaxed credit standards in the past years because of
the strong growth in the economy. In the 2008 Investor’s Meeting, CCS expressed concerns with the credit quality of the
newly acquired WaMu card portfolio and expects the WaMu card losses to reach between 18% and 24% by the end of
2009. This analyst suspects the majority of the WaMu portfolio losses will be driven by increasing net charge-offs in
troubled states (CA, FL, WA).
Government regulation, specifically the Unfair and Deceptive Acts or Practice rules (UDAP), will create
challenge for JPM in the future. UDAP will make it harder for credit card companies to raise fees and rates on the card
current portfolio. Legislation will result in short-term losses; but changes to pricing, products and promotions are expected
to produce a profitable model.10
In summary, despite the macro factors that threaten CCS, the business is taking the steps required for future
success. The business is focused on customer service, building long-term relationships, minimizing risk, and investing in
initiatives that will generates long-term returns. JPM has less risk exposure relative to their peer group, and with the
acquisition of WaMu has increased its sales force footprint through the branch network.
Growth: In the Q109 earning presentation, CCS management has indicated 2 areas of potential future growth. First, CCS
continues to increase the percentage of its rewards-based product portfolio. Approximately, 60% of JPM credit card
customers have a rewards-based product. Rewards-based customers have a higher level of engagement, which generates
higher revenue. Also, rewards-based customers have a higher level of loyalty and better risk characteristics. The second
area of future growth is in branch credit card acquisitions. The acquisition of WaMU added 2,207 new branches and
expanded the retail footprint to 7 additional states. The expanded footprint has resulted in a 10% lift in branch credit card
acquisitions. This analyst believes the branch credit card acquisition growth will continue since the sales strategy of JPM
has a higher emphasis on credit card-cross sell than WaMa.
Profitability: In the near-term, CCS does not show signs of being profitable. In JPM’s Letter to Shareholders, Jamie
Dimon stated “we do not expect to make any money in Card Services this year”.
9
Source of Data: http://online.wsj.com/article/SB124104752340070801.html
Source of Data: http://www.cnbc.com/id/30847930
10
Page 10 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
This analyst believes CCS will not only be profitable, but losses will settle in a range between $700MM and $1B.
In the next 12 months, the primary drivers of losses will be increasing unemployment, defaults in WaMu near prime or
subprime card portfolio, delinquencies of business cards, and trend in lower charge volume. This analyst believes CCS
should start to benefit from a reduction in credit losses, by mid 2010, contributed to a stabilizing economy, resulting in
CCS recording strong net income by 2011. [Figure.4, 4.A]
Figure.4
Card Services (in $millions)
2011E
2010E
2009E
2008
2007
2006
Total Net Revenue
21,074
19,489
17,827
16,474
15,235
14,745
Net Income (loss)
2,935
862
3,206
YoY % Change
241%
% Operating Margin
23%
Net Profit Margin
14%
(947)
780
2,919
-221%
-73%
-9%
7%
-5%
8%
30%
34%
4%
-5%
5%
19%
22%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Commercial Bank (CB)
Business Head: Todd Maclin
Overview: Commercial Banking segment offers lending, treasury services, investment banking, and asset management
services to corporations, municipalities, financial institutions, and not-for-profit entities.
Rank: JPM is top 3 in large Middle-Market, Traditional Middle-Market and Asset Based Lending11. CB is also ranked #1
originator of multi-family loans in the U.S.12 Additionally, JPM ranked #1 in CB market penetration and lead share in 3 of
the top 4 MSAs13.
Performance:
Summary
In 2008, CB reported net income of $1.4B
2008
(27%) YoY, with an ROE of 20%. CB
revenue increased 16% and percentage of
total revenue increased from 5% to 7% YoY.
Profit margin of CB increased from 28% in
2007, to 30% in 2008. Revenue
compensation was Middle Market (62%),
Mid-Corporate (19%), Real Estate (9%),
Commercial Term Lending (5%), and other
(5%).
CB net revenue decreased $-77MM (-5%) to
Q1 09
$1.4B compared to the prior quarter. On a
YoY basis, net revenue increased $335MM,
(31%) compared to Q108. CB reported net
income of $338MM a decrease $-142MM (30%) compared to the prior quarter. On a
YoY basis, CB net income increased $46
MM compared to Q108.
Drivers
Performance was driven by a combination of strength in
lending and deposit fees and good expense control. CB
achieved record results in gross investment banking
revenue of $966MM, up 9%. Construction and
development loans were the main drivers of credit costs.
Although, C&D only accounted for roughly 10% of loans.
In Q408, credit costs started to increase, resulting in Q408
charge-offs being $118B, a 195% increase compared to
Q308. During the same period, loan loss provisioning rose
51% to $190MM.
Revenue increased YoY, due to the impact of the WaMu
transaction and higher noninterest revenue. Noninterest
revenue increased with incremental growth in lending &
deposits. CB had a record quarter generating 10,000 new
accounts fueled by “flight to quality”. Revenue decreased
compared to prior quarter, as a result of narrowing spreads
related to liability products and lower depositary revenue.
Credit costs increased in the quarter, as a result of a
weakening credit environment. Nonperforming loans
increased 50% compared to prior quarter, driven by
negative credit migration across most lending categories.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
11
Source of Data: Loan Pricing Corporation, FY08
12
Source of Data: FDIC and OTS as of 9/30/08
13
Source of Data: TNS Market Study, 3Q08 YTD
Page 11 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Outlook
Sustainability: JPM Commercial Bank has prepared to manage through the weak economy by tightening underwriting
standards, exiting weak credits, and creating problem loan prevention teams. In addition, the segment has been very
proactive in managing renewals and refinancing to reduce risk exposure. CB management stated in the Q109 Investors
meeting that JPM is committed to Commercial Bank because it is a good source of noncredit revenues, with average
annual revenue growth of 21% between 2005 and 2008, and it is essentially self funded, with a loans-to-deposits ratio of
1.03x.
CB has always managed loan risk exposure by setting high standards for loan terms and strict guidelines for preselecting prospects. The majority of CB clients are privately-owned, multi-generational family businesses, a demographic
that traditionally has low volatility. Loan structure typically is largely collateral-based with borrowing based advances
adjusted for level of risk.
CB management has indicated strong performance will continue in Commercial & Industrial loans. Non-credit
expense has remained flat for the last three years indicating controllable expenses are actively being managed. However,
the segment has started to experience higher credit costs in commercial construction and real estate. Construction and
development (C&D) loans are expected to be the main driver of credit costs in the Commercial Bank in the near future,
although C&D only accounts for roughly 10% of loans. The real estate lending operation will continue to be an area of
concern for the next two years because of its $63B in credit exposure. Proactive and consistent risk management
combined with a diversified portfolio has established the foundation that will drive the future success of CB.
Growth: The newly acquired WaMu commercial and commercial term lending portfolios are trending better than
expected results, and indicating substantial growth opportunities in the future. Additionally, the strong trend in “flight to
quality” will build market share and financial strength by increasing new account rate and generating cross-sell. This
analyst expects higher credit costs due to nonperforming loans in the next 12 months, but not high enough to result in a
negative growth rate.
Profitability: JPM provided guidance for CB revenue of $1.4B over the next several quarters. Over the next 18 months,
the C&D and real estate and lending portfolios will generate losses that reduce the net income of CB, but the segment will
record strong growth over the next few years. This analyst forecasts that the increased customer base and footprint from
the WaMu acquisition will result in earning growth, contributed to increased lending and deposit fees. [Figure.5, 5.A]
Figure.5
Commercial Banking (in $millions)
2011E
2010E
2009E
2008
2007
2006
Total Net Revenue
7,091
6,484
6,112
4,777
4,103
3,800
Net income
2,613
1,856
1,685
1,439
1,134
1,010
YoY % Change
41%
10%
17%
27%
12%
% Operating Margin
50%
43%
45%
50%
45%
44%
Net Profit Margin
37%
29%
28%
30%
28%
27%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Treasury & Securities Services (TSS)
Business Head: Heidi Miller
Overview: The Treasury and Securities Services segment provides transaction, investment, and information services to
institutional clients. It also offers custodian services and cash management solutions; including trade finance and logistics
solutions, wholesale card products, and liquidity management services.
Rank: JPM is #1 in ACH Originations14, US Dollar Treasury Clearing and Commercial Payments15.
14
15
Source of Data: FLmetrix’s
Source of Data: JPM Investor Day Feb 26, 2009
Page 12 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Performance:
Summary
In 2008, TSS reported record net income of $1.8B
2008
(24%) YoY, with an ROE of 47%. TSS revenue
increased 17% and percentage of total revenue
increased from 9% to 11% YoY. TSS profit margin
increased from 20% in 2007, to 22% in 2008.
Revenue composition was 44% Treasury Services
(cash mgmt., trade finance & logistics, and
liquidity) and 56% Worldwide Securities Services
(custody and securities lending). Approximately
50% of revenue is related to international
businesses, and in 2008 this revenue grew by 15%.
Q1 09
TSS net revenue decreased $-428MM (-19%) to
$1.8B compared to the prior quarter. On a QoQ
basis, net revenue decreased $-92MM (-5%)
compared to Q108. TSS reported net income of
$308MM a decrease $-225MM (-42%) compared to
the prior quarter. On a QoQ basis, TSS net income
decreased $-95MM (-24%) compared to Q108.
Drivers
In 2008, TSS was able to produce good
margins, maintained strong global scale and
retain long-standing clients. TSS AUM
decreased by 17% to $13.2B in 2008. Also,
average liability balances increased 22% to
$280B, as a result of client “flight to quality”.
In 2008, TSS established relationships with
more than 250 significant new clients,
representing more than $80MM in annualized
revenue. TSS generates 50% of its revenue
from business outside the United States.
Revenue decreased compared to prior quarter, as a
result of declining balances and spreads in both
liability products and securities lending. Expense
increased 7% YoY, due to higher FDIC insurance
premiums and investment in new product platforms.
Total liability balances increased 9% YoY, but
declined 18% compared to prior quarter. The pretax
margin of 26% was down from 37% in the prior
quarter and 34% YoY as a result of negative
operating leverage.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
Outlook
Sustainability: TSS is a stable non-capital-intensive segment of JPM. The client base of TSS is only around 50,000;
small compared to the other segments in JPM, but the clients are highly loyal and profitable. The segment is making the
technology and infrastructure investments to continue to be the world's largest provider of treasury management services.
TSS operates in 39 countries with strong organic growth in the U.S., Europe, Asia Pacific and Latin America. TSS is an
industry leader and will continue to generate a solid performance in the next 12 months.
Growth: In the next 12 months, TSS has significant growth opportunity by capitalizing on the WaMu footprint. TSS
management stated that the segment expects to increase its capabilities in India and China, and increase its market share in
the Nordics and Baltics. Analysis suggests that the TSS will have a positive benefit from the “flight to quality” to JPM
over the next year.
Profitability: JPM provided TSS revenue guidance of $2B an each quarters for 2009. TTS guidance was used as a
benchmark forecasting future earnings. In the opinion of this analyst, the main drivers of future net income growth, over
the next 24 months, will be “flight to quality” and expanded market share.[Figure.6, 6.A]
Figure.6
TS&S (in $millions)
2011E
2010E
2009E
2008
2007
2006
Total Net Revenue
10,909
9,536
8,930
8,134
6,945
6,109
Net Income (loss)
2,272
1,973
1,816
1,767
1,397
1,090
YoY % Change
15%
9%
3%
26%
28%
% Operating Margin
32%
32%
31%
33%
32%
28%
Net Profit Margin
21%
21%
20%
22%
20%
18%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Page 13 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Asset Management (AM)
Business Head: Jes Staley
Overview: Asset Management segment provides investment and wealth management services to institutions, retail
investors, and high-net-worth individuals. It offers global investment management, trust, estate, retirement and banking
services.
Rank: Largest manager of AAA-rated global liquidity funds16 and largest Hedge Fund manager17
Performance:
Summary
In 2008, AM reported net income of $1.4B
2008
(-31%) YOY, with an ROE of 24%. AM
revenue increased -12% and percentage of
total revenue decreased from 12% to 10%
YOY. AM profit margin decreased from
23% in 2007, to 18% in 2008. Revenue
composition was Private Bank (34%),
Private Wealth Management (18%),
Institutional (23%), Retail (21%) and BSC
Brokerage (3%).
Q1 09
AM net revenue increased $45MM (3%) to
$1.7B compared to the prior quarter. On a
YoY basis, net revenue decreased $198MM (-10%) compared to Q108. AM
reported net income of $224MM a decrease
of $-31MM (-12%) compared to the prior
quarter. On a YoY basis, AM net income
decreased $-132MM compared to Q108.
Drivers
Total AUM declined only 5% YOY despite the turbulent
market condition, ending at $1.1T. Private Banking revenues
increased 9% and Private Wealth Management increased 4%
in 2008. Private Banking delivered strong results in 2008,
due to market share gains as a result of “flight to quality”.
Private Banking AUM net asset flow in 2008 was $75B, a
45% increase over 2007, and delivered 1,400 new $10MM
client accounts. The money market cash business grew AUM
53% due to the “flight to safety. The Liquidity fund was
another area where the company reported major asset
inflows. Although, alternatives were down 17% to $100B
during 2008, due to the industry facing illiquidity and
shrinking leverage.
AM revenue in Q109 decreased YoY, due to declines in
AUM market value; however, decline was practically offset
by lower asset management, admin and commissions.
Expense decreased -2% YoY, due to lower performance
based compensation and lower headcount-related expense,
offset by higher FDIC insurance premiums. During the
quarter, AUM declined $-18B (-6%) to $1.1T due continued
weakness in the market. AUS declined $-32B (-2%) to
$1.5T. Although, AM generated net inflows in liquidity of
$15B for the quarter.
Source of Data: JPM 2009 Annual Report, JPM 2009 Letter to Shareholders and JPM 1Q09 Earnings Transcript.
Outlook
Sustainability: AM has actively managed its market risk, which has enabled it to avoid many of the issues faced by its
competitors. AM has minimized its exposure to structured notes and SIVs, which has protected it during the recession.
Credit exposure is actively managed through strict lending standards and limited margin lending. Management stated AM
continues to focus on reducing errors and is recording positive results. The number of errors decreased 48% from 2006 to
2008. Additionally, AM will continue success in both private banking and private wealth management in this unstable
market, because of its strong balance sheet. AM maintains a significant investment and wealth management portfolio with
AUS at $1.5T and AUM at $1.1T. JPM is the largest manager of AAA-rated liquidity funds and has built global
institutional market share to 17%, almost twice as large as the next competitor. AM remains dedicated to private banking
customer service and growth, by adding more than 235 new bankers in the last 2 years. In conclusion, AM has managed
risk, diversified fixed income investments, and demonstrated stability, allowing the business to achieve long term
performance.
16
17
Source of Data: iMoneyNet, December 2008
Source of Data: Absolute Return Magazine, September 2008 Businesses issue
Page 14 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Growth: In 2008, AM acquired on average six new +$10m clients a day, while the money market cash business grew
AUM an amazing 53%, which has been contributed to “flight to quality”. The market is indicating this trend will
continue for at least the next 12 months. Additionally, AM plans to capitalize in the secondary markets by buying
undervalued distressed private equity holdings, and the Real Estate division plans offer sub-advisory services.
Profitability: JPM provided guidance for AM revenue of $1.8B over the next several quarters, assuming no significant
decrease in current market condition. This guidance was taken into consideration when forecasting the future earnings of
AM. This analysis forecasts a consistent 30% net profit margin and future net income growth of 5% to 7% YOY, over the
next 3 years.[Figure.7, 7.A]
Figure.7
Asset Management (in $millions)
2011E
2010E
2009E
2008
2007
2006
Total Net Revenue
8,889
8,316
7,825
7,584
8,635
6,787
Net Income (loss)
1,696
1,488
1,413
1,357
1,966
1,409
YoY % Change
14%
5%
4%
-31%
40%
% Operating Margin
31%
29%
29%
29%
36%
33%
Net Profit Margin
19%
18%
18%
18%
23%
21%
Source of Data: JPM Investor Day Feb 26, 2009, JPM 2009 Annual Report, 1Q09-Investor-Presentation and JPM 1Q09 Earnings Transcript.
Financial Sector Outlook
The current recession is entering its 18 month, the longest recession in history since WWII. This analyst believes
that stability in the financial sector will provide the foundation to lead the U.S. out of this recession. The current
Administration, Congress, and Federal Reserve have taking the steps to stabilize the U.S. financial institutions, which is
expected to increase consumer confidence and assist to restore the normal flow of credit. Continued restoration of the flow
of credit will provide the economy the leverage required to organically grow, setting the foundation for an economic
recovery. Currently, creditworthy customers are able to access credit easier than 3 months ago and banks have recorded
higher liquidity ratios. Although, loan originations have increased, this analyst can not find evidence that shows booked
loans have increase at the same rate over the last 3 months. The lower booked ratio could be a result of the rising
unemployment, declining home prices and decreasing GDP that continue to deteriorate credit quality. These struggling
macro-factors are still causing some businesses and consumers not to be able obtain credit because of the risk of default
based on the current environment.18
In 2009, the Financial sector expects strong companies to continue to gaining market share and the weak
companies continue to deteriorate due increased exposure to credit costs. The strong growth over the last 3 months in the
sector has been contributed to a few companies that have had recorded significant growth, resulting in weak breadth of the
Financial sector [Figure.8]. The Financial sector will continue to be challenged by higher credit costs in the near future;
although, this analyst expects the sector to only slightly outperform S&P 500 over the next 12 months. Financial sector
forecast is supported in the Performance Analysis section.
Figure.8
Sector
Financial
Index Value
164.44
% S&P 500
13.52
May
13.1
Price Changes (%)
3 Month
YTD
2008
62.6
-2.6
-56.9
5-Yr
-15.6
Beta
1.6
5 Year
Std. Dev.
27.8
Source of Data: S&P GICS Scorecard – 5/29/09
18
Source of Data: www.cnbc.com/moneywatch
Page 15 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Diversified Financial Services Outlook
The S&P 500 GICS Diversified Financial Services industry is comprised of three stocks JPMorgan Chase
(JPM), Banking of America (BAC) and Citi Group (C). The same headwinds experienced by the Financial sector will
pressure the Diversified Financial Services industry over the next 12 months. Over the last three months, the industry has
recorded significant growth, but this analyst believes the returns will start to level off over the next 6 months, as the
industry approaches fair value [Figure.9]. Although, this analyst expects the industry to marginally outperform the S&P
500 Index over the next 12 months. Diversified Financial Services industry forecast is supported in the Performance
Analysis section.
Figure.9
Price Changes (%)
Industry
Divs. Fin. Srvs.
5 Year
Index Value
% Industry
May
3 Month
YTD
2008
5-Yr
Beta
Std. Dev.
40.48
22.57
16.5
93.2
-6.1
-57.5
-19.3
1.7
39.3
Source of Data: S&P GICS Scorecard – 5/29/09
Performance Analysis
Historical Performance
Although, past performance does not guarantee future results, analysis of historical JPM returns can provide
insight into future performance. In the opinion of this analyst, historical return frequency and compounded rate of return
are two key measures that can provide guidance into the future performance.
Frequency
The historical frequency of which the returns of JPM beat the returns of its benchmark (S&P 500), sector and
industry, can provide insight into the future performance of the company. This analyst requires the historical returns of
JPM to be consistently above the compared index at least 2 out 3 times (67%) to statically favor future outperformance.
Figure.10 displays the number of months the historical returns of JPM outperformed the historical returns of the
S&P 500. Over the last 25 years JPM has outperformed the returns of the S&P 500 140 (47%) months out of the last 300
months. JPM beat the monthly returns of the S&P 500 only 53% during the last 10 years and 56% during the last 3 years.
In the past year, JPM outperformed the monthly returns of the S&P 500 only half of the last 12 months.
This analyst believes the historical frequency data does not provide statistical evidence to forecast JPM will beat
the returns of the S&P 500 in the next 12 months. The frequency data does indicate a high probability that the returns of
JPM will only beat the returns of the S&P 500 6 (50%) of the next 12 months. Also, investors should note, since January
1984 no one month statically favored the returns of JPM outperforming the returns of the S&P 500 [Chart 1.A]. In
conclusion, the frequency of which the historical returns of JPM beat the historical returns of the S&P 500 did not provide
statistically significant insight to predict future JPM performance.
The number of months the historical returns of JPM outperformed the historical returns of the Financial sector did
not demonstrate any statistically significant data to predict future JPM performance against the Financial sector
[Figure.11]. The number of months the historical returns of JPM outperformed the historical returns of the Diversified
Financial Services industry shows statistically significant insight to predict future JPM performance over the last 12
months. The current momentum over the last 12 months suggests a potential for JPM to outperform Diversified Financial
Services in the future [Figure.12].
Page 16 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.10
Frequency: Number of months the returns of JPM outperformed the returns of S&P 500
Frequency
S&P 500
JPM
Total
Last 25 Years
53%
47%
100%
Last 20 Years
51%
49%
100%
Last 10 Years
53%
47%
100%
Last 5 Years
57%
43%
100%
Last 3 Years
56%
44%
100%
Last 12 Months
50%
50%
100%
Figure.11
Frequency: Number of months the returns of JPM outperformed the returns of Fin. sector
Frequency
Fin. Sector
JPM
Last 25 Years
N/A
Last 20 Years
55%
45%
Last 10 Years
55%
45%
Last 5 Years
52%
48%
Last 3 Years
47%
53%
Last 12 Months
42%
58%
Figure.12
Frequency: Number of months the returns of JPM outperformed the returns of Diversified Financial Service industry
Frequency
DFS
JPM
Last 25 Years
N/A
N/A
Last 20 Years
N/A
N/A
Last 10 Years
N/A
N/A
Last 5 Years
N/A
N/A
Last 3 Years
42%
58%
Last 12 Months
33%
67%
Source of Data: Thompson Baseline
Return data as of 4/30/2009
Compounded Rate of Return
Additionally, the historical compounded rate of return of JPM compared the historical compounded rate of return
of S&P 500, industry and sector is a potential indictor of future performance. This analyst prefers to use the compound
rate of return verse the average of returns as it is more reflective of the actual returns. The compounded rate of return
analysis compliments the frequency analysis because it accounts for the extent at which JPM outperformed the returns of
the S&P 500, industry and sector not just the number of times.
The monthly compounded rate of return of a dollar invested in the S&P 500 and in JPM over the last 25 years is
shown in Figure.13. A dollar invested in the S&P 500 25 years ago would be worth $5.45 compared to $1.04 if that
dollar was invested in JPM. Although, the monthly compounded rate of return for the S&P 500 has outperformed JPM
over the last 20 and 10 years, JPM has outperformed the S&P 500 monthly compounded rate of return over the last 5 and
3 year. Over the last 12 months the monthly compounded rate of return of a dollar invested in JPM was slightly greater,
than a dollar invested in the S&P 500. While the percentage that JPM outperforms the S&P 500 over the last 5 years is
decreasing, the monthly compounded rate of return data suggests JPM has the momentum to outperform the S&P 500 in
the near future. In the last 5 years, neither the Financial sector nor the Diversified Financial Services industry monthly
compounded rate of return have challenged the returns of JPM.
Figure.13
Compounded Return of $1
Compounded Rate of Return
S&P 500
Last 25 Years
Last 20 Years
Last 10 Years
Last 5 Years
Last 3 Year
Last 12 Months
$5.45
$2.82
$0.67
$0.78
$0.67
$0.63
$2.10
$0.43
$0.38
Financial Sector
Diversified Financial Services
JPM
$1.04
$0.92
$0.46
$0.90
$0.32
$0.41
$0.27
$0.37
$0.73
$0.69
Source of Data: Thompson Baseline
Return data as of 4/30/2009
Page 17 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Regression Model
When conducting this regressions analysis this analyst reviewed 15 marco-factors assumed to affect the monthly
returns of the Financial sector and JPM [Table.1.A]. The objective of this regression analysis was to determine whether a
statistically significant relationship existed between the monthly change in any of the 15 marco-factors and the monthly
change in returns of the Financial sector and JPM. Additionally, a regression analysis was conducted to determine
whether the monthly change of any of the 15 marco-factors had a statistically significant relationship to forecast future
monthly change in returns of the Financial sector and JPM. This analyst considers a macro-factor (independent variable)
with a p-value less than 0.5 to be statistically significant. In the case that a macro-factor(s) was identified in the initial
regression analysis as being statistically significant, an additionally regression analysis was ran with only the statistically
significant factor(s) to assure that the statistical significance of the factor(s) was not affected by other factors in the
regression. Past experience has taught this analyst that regression models can provide useful insight into determines the
factor(s) that affect changes in sector or company returns, but regression analysis can also lead to false conclusions due to
the many interdependencies of the macro-factors and returns. This analyst prefers to view statistically significant factor(s)
identified by a regression analysis as a benchmark, than justify the factor(s) by applying common sense and knowledge of
the sector or company.
Financial Sector: On a monthly change basis, CPI (+) and consumer confidence (+) were positively correlated and
statically significant macro-factors that explain 12% of the variance in the monthly returns of the Financial sector. On a
forecast basis, Rf (-) and CPI (+) and unemployment (-) are statically significant macro-factors that explain 11% of the
variance in returns of the Financial sector that occur in the next month. Rf (+) and unemployment (-) are statically
significant macro-factors that explain 8% of the variance in the monthly returns of the Financial sector that occur three
months later. The statistically significant macro-factors identified for the Financial sector did not explain a large portion
of the variance in the monthly returns of the sector, but this analyst believes the factors are relevant and provide tangible
insight into future performance.
JPM: On a monthly change basis, Consumer confidence (+) and Aaa corporate rate spread (-) were statically significant
macro-factors that explain 10% of the variance in the monthly returns of JPM. On a forecast basis, rf (+), Aaa corporate
rate spread (-) and unemployment (-) are statically significant macro-factors that explain 14% of the variance in returns of
JPM that occur two month later. Macro-factors retail sales (+) and balance of trade (+) are statically significant and
explain 9% of the variance in returns of JPM that occur three month later. Although, the statistically significant macrofactors identified for JPM have not explained a large portion of the variance in returns of the company, the regression
model and company analysis have both identified rising unemployment to be correlated to negative performance.
Company analysis has identified widening credit spreads to increase performance of some lines of business; however,
regression analysis shows widening credit spreads are correlated to negative company performance.
Source of Data: Thompson Baseline, Macro-factors
Technical Assessment
Financial Sector: Over the last three months the technical analysis on the Financial sector chart is indicating tested upper
and lower trendlines establishing an upward sloping channel. An upward sloping channel suggests continued growth in
the future, which is also being suggested by the ratio analysis covered in the Ratio Valuation section. However, this
analyst is concerned with the slight broadening of the channel over the last month. The broadening of the end of an
upward sloping channel is called a megaphone, which historically suggests growing disagreement of the market on the
price of the companies in the Financial sector. The disagreement on price is not a good sign and normally is followed by
a downward movement. The current uncertainty in the financial sector over a weakening credit market and increased
threat of government regulation could be driving a potential disagreement of the market on an acceptable price.
Additionally, the slight broadening of the channel over the last month could be a result of the market being uncertain
whether the winners will be stronger than the losers in the sector, since the recent growth of the sector has been driven by
only a few companies. [Chart.2]
Page 18 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Diversified Financial Services Industry: Over the last three months the technical analysis on the Diversified Financial
Services industry mirrors the Financial sector. However, over the last month a horizontal lower trendline had developed
with a downward sloping upper trendline. This is called a descending triangle, a “bearish” pattern that suggests a
potential downward movement. [Chart.3]
JPM: JPM has an established upward sloping channel over the last 3 months that indicated continued growth in the
future. The ration analysis on JPM is also indication indicated continued growth. The lower trendline continues to be
tested, but the stock price continues to bounce back with positive growth. The only technical concern with the channel is
gains from the bounces off the lower trendline are starting to decrease over the last month. Additionally, investors should
note that Government regulation and legislation can quickly deteriorate the channel. [Chart.4]
[Chart.2]
[Chart.3]
[Chart.4]
Ratio Valuation
Financial Sector: The Financial sector current forward P/E ratio is 16.2, which is considered to be in the fair value range.
Historically, the Financial sector has not outperformed the S&P 500. This is reflected in the 15 year forward P/E ratio
being 0.75x relative to the S&P 500. However; the current Financial sector forward P/E ratio is 1.1x relative to the S&P
500. This shows that the market expects the Financial sector to only slightly outperform the S&P 500 and this analyst
agrees with this assessment. In the opinion of this analyst, the slightly higher ratio is driven by a few firms the market
expects to record significant future earnings resulting for strong capital position, increased market share and diversified
revenues. JPM is one of the few companies expected to achieve significant future earnings, due to increasing its market
share and strengthening its core businesses through acquiring WaMu and Bear Stern at a distressed price. Financial theory
suggests that competitive forces will cause a firm’s long-term profits to revert back to the mean. Based on this
information, the Financial sector will possibly beat the returns of the S&P 500 in the next few years, but revert back to a
lower forward P/E ratio relative to the S&P 500.
The current Financial sector P/CF ratio is 2.5 relative to the S&P 500. The 15 year P/CF ratio is 0.9, considerably
lower than the current ratio. The strong P/CF ratio implies investors are confidence the Financial sector will have
sustainable earning in the future compared to other sectors. This analyst supports a P/CF ratio of 2.5 relative to the S&P
500, but analysis shows the high ratio is driven only by a handful of companies. The uncertainty of further deterioration
of the macro factors driving the recession, and the threat of increased government regulation and legislation, will test this
ratio in the future.
Diversified Financial Services Industry: The current forward P/E ratio of the industry is 32.2, which implies the market
expects the industry to have significant future growth in earnings. The Diversified Financial Services Industry forward
P/E is 2.3x relative to the S&P 500, supporting the market believes the industry may have higher than expected future
growth in earnings compared to the S&P 500. In the opinion of this analyst the market has over inflated the Diversified
Financial Services Industry forward P/E and the ratio and the ratio should be around 1.5x relative to the S&P 500. The
justification of the revised ratio is Diversified Financial Services Industry is comprised of thee companies JPMorgan
Page 19 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Chase (JPM), Banking of America (BAC) and Citi Group (C). This analyst believes that these three companies have
experience significant growth over the last three months, but the market is starting to expect these companies are reaching
fair value. This analysis believes JPM will continue to drive forward P/E ratio for the industry, but BAC and C are slightly
over-inflated based on capital reserves levels and significant credit exposure from a possible decline in the economy. This
assumption is supported by the bank “stress tests” results that required BAC and C to raise additional capital, with BAC
accounting for almost half of the total capital shortfall with $33.9B. The bank “stress tests” results did not require JPM to
raise any additional capital.
JPM: The current forward P/E ratio of JPM is 23.1, which is trending up. This analyst believes the high ratio is justified
because of the future sustainability and growth opportunities shown by JPM. Current JPM forward P/E ratio is 1.7x
relative to the S&P 500, but 0.3x relative to the industry. This indicates the JPM earnings are expected to outperform the
market, but not the industry. The data implies the Diversified Financial Services Industry has stocks that are forecasted to
outperform JPM in the future. The analysis this analyst conducted does not justify this lower forward P/E ratio relative to
the industry. The analysis suggests that JPM is better positioned to increase market share and earnings in the future
compared to its industry peers. Additionally, the 15-year medium indicates the JPM forward P/E ratio has been in-line
relative to the industry and below relative to the S&P 500. The compounded rate of return analysis validates the 15-year
medium forward P/E ratio relative to the S&P, but sufficient data was not available to justify the ratio relative to the
industry.
JPM’s current P/B ratio of 0.9 suggests the company shares are potentially selling at a discount to its fair value,
which could represent a buying opportunity. In the opinion of this analyst, a low P/B and trending higher ROE is a good
indicator of an undervalued stock. Although, JPM P/B ratio is low it has been tending higher and the ROE has decreased
compared to the prior quarter to a 20 year low; therefore, JPM is not undervalued at this time. One explanation for the low
P/B ratio is JPM had 2 substantial acquisitions in 2008, causing a slight increase in book-value resulting in a decrease in
the P/B ratio. In April 2009, an accounting change has allowed banks to value underperforming assets at their future
projected value and not at their current value. JPM leveraged this revision to mark-to-market in accounting in Q1, which
could have decreased book value resulting in an increase in the P/B ratio. Although, JPM management stated this revision
to mark-to-market in accounting had almost no positive affect on the Q1 earnings.
Target Price Analysis
Absolute Ratio Valuation Model
Summary: Absolute Ratio Valuation Model exercise conducted for JPM suggested a future target price of $43.98 per
share, 7% above the mean consensus of $41.07. This analysis believes this is a probable target price based on the
consensus target price for JPM. [Figure.14] [Figure.15]
Absolute Ratio Valuation Analysis: This analyst has found that using absolute ratio valuation can be misleading when
forecasting the target price of a company, especially with the uncertainty in the current economic environment. This
analyst only included three ratios when forecasting the target price for JPM. The ratios were forward P/E, P/B and P/CF.
The trailing P/E ratio was not included since this analyst does not believe the ratio provides tangible insight into future
earnings of JPM. Additionally, the P/S ratio was not included since the ratio does not account for the significant increase
in credit losses expected to impact the earning of JPM over the next 12 months. Financial theory suggests that competitive
forces will tend to drive the ratios of a firm to its historic mean; this is not currently the situation with forward P/E and
P/CF. The rate of change for each ratio was analyzed over the last 12 months, 6 months, and 3 months and 30 days. This
rate of change data was used to forecast the target multiples for each ratio. An average was taken of the three target prices
to derive a final target price.
Page 20 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.14
Valuation
Figure.15
JPM
Consensus Target Price
Time
15 yrs
Absolute Basis
High
Low
Medium
Current
Forward P/E
23.1
8.8
12.1
23.1
25
1.45
P/B
3.9
0.6
1.7
0.9
1.2
40.1
P/CF
17.1
4.9
9.8
17.1
19
2.50
47.50
# Analysts
43.98
Source of Data: finance.yahoo.com
Target
Multiple
Target E,S,B
per share
Average
Mean
Median
$41.07
$41.00
36.28
High
$60.00
48.15
Low
$28.00
Target Price
14
Discount Cash Flow Model
Summary: This Discounted Cash Flow Model (DCF) shown in Figure.16.A, derived an implied value of $43.95 per
share for JPM, 7% above the mean consensus of $41.07. This analysis believes this is a probable target price based on
consensus target price, Absolute Ratio Valuation Model and performance analysis conducted on JPM. The DCF Model
and Absolute Ratio Valuation Model were developed separately, with no bias toward a target price. The difference
between the two models was $0.03.
Discounted Cash Flow Analysis: The DCF format used to evaluate JPM is fairly standard. The forecasted financial data
used to build the model was derived by analyzing the future sustainability and growth of JPM and each of the primary six
lines of business. Additionally, JPM issued revenue and expense guidance on a few of its lines of business, which was
either used as a benchmark or taken as stated during the forecast process. The financial data derived during the analysis
was used to forecast a net income statement for each of the primary six lines of businesses from 2009 to 2011. The lines
of business net income statements, combined with additional JPM financial statement analysis, were used to develop a net
income statement for JPM from 2009 to 2011 [Figure.1.A]. When data was unclear or not available this analyst used
historical averages, ratios and trends to forecast net income statement line items. The additional assumptions that drive the
DCF are outlined below:
ƒ Revenue growth in 2012 will be 3.5% and decrease by 0.5% every year until 2019
ƒ Expense margin will be consistent at 76.69% from 2012 to 2019
ƒ Tax rate will be consistent at 34.4%
ƒ Depreciation & amortization in 2012 will be 3.5% and decrease by 0.25% every year until 2019
ƒ Diluted earning per share: 7,705MM
ƒ Cash recorded in 2009: $375B
ƒ Terminal Discount Rate: 15%
ƒ Terminal Free Cash Flow Growth Rate: 2.5%
Sensitivity Analysis: DCF analysis is highly sensitive to changes in the discount rate and the terminal free cash flow
growth rate. The sensitivity analysis model demonstrates the impact slight changes to the discount rate and/or the terminal
free cash flow growth rate have on the implied share price derived by the DCF. The analysis in Figure.17 shows the
ranges of the implied share price varies depending on the combination of the discount rate and the terminal free cash flow
growth rate. This analyst decided to use a terminal discount rate of 15% and terminal free cash flow growth rate 2.5%.
Historically, the average terminal discount rate for a financial company is around 12%. Although, since the future
earnings of JPM will be challenge by rising unemployment and higher credit costs a terminal discount rate of 15% was
applied. A normal free cash flow growth rate ranges from 2% to 4%. However, the market has shown signs of continued
growth, but faces future challenges from decreasing GDP, unemployment and other key macro-factors. This analyst
believed it was justified to apply a 2.5% terminal free cash flow growth rate to the JPM DCF. WACC analysis was
conducted, but this analyst could not justify the results as being valuable [Figure.18.A].
Page 21 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.17
Investment Thesis
Summary: JPMorgan Chase & Co. has been given a BUY rating, projecting a 12 month target price of $43.95, 21.72%
above the current price of $36.11. The 2009 EPS estimate is $1.45, in-line with consensus. The 2010 EPS estimate is
$2.73, 3% above consensus of $2.66. JPM's strong capital base supports a diversified company with sustainable earnings
capacity. The recent acquisitions of Bear Sterns and WaMu have positioned JPM for long-term earnings growth. Over the
next 12 months, JPM will continue to be challenged by rising credit costs, increasing unemployment and threat of
government regulation. Although, JPM is not immune to these headwinds, the company is positioned to fundamentally
outperform its peers and earn though the struggling economy.
Page 22 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Appendix
Ratio Valuation Methodology
Trailing P/E: This analyst uses the forward P/E ratio instead of the trailing P/E ratio to predict future earning. The trailing
P/E ratio is calculated by dividing the current stock price by its trailing earnings per share for the past 12 months. Since
the trailing P/E ratio uses historical data, this analyst believes the forward P/E ratio is a more relevant benchmark when
evaluating the future performance of a company.
Forward P/E: A company with a high forward P/E ratio can be interpreted as either, the market expects the company to
have large future earnings growth compared to a company with a lower forward P/E ratio, or the company is simply
overvalued. The forward P/E ratio is calculated by dividing the current price of the stock by its forecasted year end
earnings. A forward P/E ratio of 25 suggests investors are willing to pay $25 for every $1 of expected future earnings.
Although, this analyst is still suspicion of published forward P/E ratios since the ratio is calculated from estimated future
earnings. Remember, a P/E ratio can be referred to as P/E multiple, because it indicated the amount investors are willing
to pay per dollar of earnings.
P/E Ratio
N/A
0–10
Definition
A company with no earnings has an undefined P/E ratio. By convention, companies with losses (negative
earnings) are usually treated as having an undefined P/E ratio, although a negative P/E ratio can be
mathematically determined.
Either the stock is undervalued or the company's earnings are thought to be in decline. Alternatively, current
earnings may be substantially above historic trends or the company may have profited from selling assets.
10–17
17–25
For many companies a P/E ratio in this range may be considered fair value.
Either the stock is overvalued or the company's earnings have increased since the last earnings figure was
published. The stock may also be a growth stock with earnings expected to increase substantially in the future.
25+
A company whose shares have a very high P/E may have high expected future growth in earnings or the stock
may be the subject of a speculative bubble.
http://en.wikipedia.org/wiki/PE_ratio
P/S: The P/S ratio is calculated by dividing a stock's current price by its last 12 months revenue per share. In the opinion
of this analyst a positive P/S ratio is less than 1.0 because investors are paying less for each unit of sales, but in some
cases a low P/S ratio could indicate an unprofitable business. The ratio provides the most value when comparing similar
companies since the ratio varies across industries. Although, the ratio does not account for the growth and risk of a
company it has proven to be a solid indicator of strong future revenue. S&P CompuStat research, conducted by James
O'Shaughnessy, concludes that "No matter what the style of investing, low price-to-sales ratios beat the market more than
any other value ratio, and do so more consistently." http://www.investopedia.com
P/B: P/B ratio is calculated by taking the current price of a stock and dividing it by last quarter's book value per share. P/B
ratios vary across industries and the ratio is most effective when compared to companies in similar industries. This analyst
normally defines a good P/B ratio to be greater than 3.0. P/B ratio less than 3 can mean either the shares of the company
are selling at a discount, which represents a buying opportunity, or there is a critical fundamental problem with the
company. The best way to determine whether the company is undervalued is compare to the ROE to the P/B ratio of the
company. The change in a ROE of the company should posititively correlate to the change in the P/B ratio of the
company. The positive correlation is justifed by an increase in ROE, which should increase the demand for the shares of
the company. Greater demdand for the shares of the company will result in an increase in the stock price. Therefore, a
low P/B and trending high ROE is a solid indicator of an undervalued stock. Additionally, a P/B ratio of 2.0 indicates that
for every $1 of tangible assets there is $2 of market value. Remember, P/B ratio does not account for firm risk and is
calculated in relation to assets not the ability to generate profit.
P/CF: P/CF ratio measures the market's expectations of the future financial sustainability of the company. P/CF ratio is
derived by dividing the current share price by the total cash flows from operations. The P/CF ratio is effective in
comparing sectors, since the ratio is less affected by differences in industry accounting practices.
Page 23 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Equity Rating
BUY: In the opinion of this analyst, a stock rated BUY is materially undervalued and represents an attractive investment
candidate. The expectation of the analyst is the stock to increase 20% within the next 12 months.
HOLD: In the opinion of this analyst, a stock rated HOLD is either fairly valued or modestly undervalued. The analyst
expects the stock to increase 1% and 20% within the next 12 months.
SELL: In the opinion of this analyst, a stock rated SELL is overvalued and could decline in value within the next 12
months. The potential price decline could be of any magnitude and is quantified by the analyst's target price.
Acronyms
AUM: Assets Under Management
AUS: Assets Under Supervision
B: Billion
LLR/Total Loans ratio: Loan Loss Reserve/Total Loans
LLR/NPLs ratio: Loan Loss Reserve/Nonperforming Loans
MM: Million
T: Trillion
Analyst Note
ƒ All lines of business revenue are reported on a managed basis. JPM reviews the results of the lines of business on a
“managed” basis, which is a non-GAAP financial measure. JPM’s definition of managed basis starts with the reported
U.S. GAAP results and includes certain reclassifications that assume credit card loans securitized by CS remain on the
balance sheet and presents revenue on a fully taxable-equivalent (“FTE”) basis. These adjustments do not have any
impact on net income as reported by the lines of business or by the Firm as a whole.
ƒ Regression Analysis: R2 was used to calculate variance in final regression models
ƒ Technical Assessment: A significant trendline has 3 solid touches
Page 24 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figures and Charts
Figure.1.A – JPMorgan Chase & Co.
Page 25 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.2.A – Investment Banking
Figure.3.A – Retail Financial Service
Figure.4.A – Credit Card Services
Page 26 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.5.A –Commercial Banking
Figure.6.A –Treasury & Securities Services
Figure.7.A –Asset Management
Page 27 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.16.A
Page 28 of 29
Diversified Financial Services
JP Morgan Chase & Co. (JPM)
Figure.18.A
Chart.1.A
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan
Feb
Mar
Apr
May
JPM
June
July
Aug
Sept
Oct
Nov
Dec
S&P 500
Source of Data: Thompson Baseline
Return data from 1/1/1984 to 5/31/2009
Table.1.A
Number Macro Factors
1
mktrf
2
rf
3
Consumer Confidence
4
Business Confidence
5
Unemployment Rate
6
CPI
7
Real Federal Funds Rate
8
Aaa Corporate Rate Spread
9
Case Shiller Home Price (20-Metro)
10
Brent Crude Oil Spot Price
11
Consumer Credit Outstanding
12
Real Consumer Spending
13
Personal Saving Rate
14
Retail Sales
15
Balance of Trade
Page 29 of 29