JPMorgan Chase Stock is a solid bet with CEO Jamie Dimon

Once considered "too big to fail" a decade ago, today's big US banks are big enough – with plenty of capital and enormous profit power – to deal with any economic downturn. JPMorgan had a net profit of $ 32.5 billion in 2018, more than any other US company, apart from Apple.

This type of profit, combined with cheap market valuations and post-crisis stability, should make bank stocks more attractive. But that did not happen, creating an attractive investment opportunity.

"The volatility of our results is very low over time, even surprisingly in activities such as fixed income trading, where a large portion of revenue is consistent, year after year," said Jamie Dimon, Chief Executive Officer. General of JPMorgan, a recent interview. He cited consumer banking and asset and wealth management as two resilient areas. "The macro environment does not change anything we do," added Dimon. "We invest throughout the cycle. The underlying economy is still doing well.

The 63-year-old CEO, dressed in casual jeans and a dark blue shirt, spoke with Barron at the bank's temporary headquarters in downtown Manhattan. The former JPMorgan headquarters on Park Avenue is being demolished to make room for a much larger replacement, which is expected to be completed by 2025.

Under Dimon's leadership since 2006, JPMorgan has become the world's leading bank with the highest management talent and outstanding returns.

The forces of society are underestimated. This does not help that banks are classic values ​​in a market that favors growing businesses more and more. Indeed, JPMorgan could be the most popular stock among value investors.

The shares, at around $ 110 recently, are trading against 11 times projected earnings for 2019 of $ 10 a share and are reporting close to 3%. The bank is expected to increase its quarterly payments, currently 80 cents a share, to about 90 cents after the Federal Reserve releases the results of its annual stress tests for major banks later this month.

"Since the financial crisis, JPMorgan has been gaining market share almost every year in almost every business and has posted some of the best performance indicators in the industry," said Jason Goldberg, Barclays analyst. He ranks JPMorgan among his best choices, with a target price of $ 140.

And if the Fed cuts interest rate, as expected this year – perhaps at its meeting in June or July – JPMorgan and other banks could be ready to "party like in 1995," says analyst Mike Mayo from Wells Fargo, evoking the end of the Fed's tightening cycle 14 years ago. A reverse yield curve, with short rates above long-term rates, "could be mitigated by extending the business cycle and potentially improving loan growth," said Mayo.

Dimon often speaks of the balance sheet of the "fortress" of JPMorgan. Although this is a little exaggerated, given the financial debt of the bank, he is right. Since 2008, JPMorgan's tangible capital has more than doubled to $ 187 billion, while assets have increased by only 25% to $ 2.7 trillion.

Like many of its rivals, JPMorgan will return substantially all of its earnings to shareholders in the form of dividends and share repurchases during the year ended June 30. It is planned to do so again in the next 12 months. The total number of outstanding shares of JPMorgan decreased by almost 5% in 2018 and is expected to fall by a similar amount this year. The big banks have the best history of capital repayment from all sectors.

Nevertheless, the pessimism seems to be anchored in the actions of the banks. For example, they may not benefit from the earnings stability of electric utilities, but they trade for half the price / earnings ratio of this sector in crisis and have comparable dividends. And the group of banks is trading at almost its lowest valuation, compared to the S & P 500 index, in 40 years.

"Just as the stock market was unduly upbeat about JPMorgan and the group before the financial crisis, it is now overly pessimistic," says Mayo.

Warren Buffett is an investor who does not accept the lugubrious bank scenario. the
Berkshire Hathaway

(BRK.B) The CEO, who has long been a Dimon fan, has bought more than $ 6 billion worth of JPMorgan stock over the last three quarters – the largest purchase of Berkshire during this period. Its average cost per share is the current price.

Buffett told CNBC earlier this year that it had been "stupid" not to have bought JPMorgan earlier, given his admiration for Dimon and the franchise. And he suggested that, given the bank's financial performance – with a tangible return on equity of 17% in 2017 – with a profitability of 17% -, equities should trade at least three times their tangible book value. , which would put them above $ 170. They are now reporting just under twice the tangible pound of nearly $ 58 per share.

Berkshire has every opportunity to buy more from JPMorgan because it holds only 2% of the capital, well below the 10% of a bank that regulators allow any investor to hold. Buffett is probably the biggest fan of the industry: Berkshire holds substantial holdings in all major banks, with the exception of
Morgan Stanley

(MS) and
Citigroup

(C) Berkshire is the biggest holder of both
Wells Fargo

(WFC) and
Bank of America

(BAC), with an interest of nearly 10% in each.

Another positive point For the big banks, Washington is less scrupulous after being at the center of federal regulators for years after the 2008-09 financial crisis. On Thursday, the Fed announced that it had put an end to a lawsuit against JPMorgan because of the huge losses suffered in 2012 by the trading of a UK employee, the "London Whale".

One of JPMorgan's main strengths is its leader, who is widely known in the industry as "Jamie". He is one of the few American CEOs, including Buffett, Jeff Bezos of
Amazon.com

(AMZN) and Mark Zuckerberg
Facebook

(FB) – who personify their businesses.

Dimon regularly says that although JPMorgan is not planning a recession, he is ready to do it. He loves the franchise of the bank and sees opportunities for growth "everywhere".

JPMorgan is now No. 1 in credit cards, investment banking and private banking and No. 2 in consumer deposits behind Bank of America. After being stuck under the Obama administration, the bank began opening branches in new premises in 2018; it adds 400, at a cost of about $ 700 million, to cities like Boston, Philadelphia and Washington.

Backed by $ 11 billion in annual technology spending, JPMorgan is expanding its digital consumer banking capabilities and putting pressure on small and medium-sized banks. Its market share of national deposits increased from 3.6% in 2006 to 9%.

One reason
BB & T

(BBT) and
SunTrust Banks

(STI), two of the largest regional, decided to merge this year to consolidate their technology spending to better compete with JPMorgan Bank of America and Wells Fargo.

"Goliath wins" Mayo says.

Despite the construction frenzy, Dimon's strategy includes transferring transactions from relatively expensive branches to mobile banking. The bank has 51 million digital users and consumers can open a JPMorgan account digitally in three to five minutes.

The company derives approximately 45% of its revenues from the consumer bank, which includes credit cards and mortgages, and 35% from corporate and investment banking, where its brokerage business is located. The commercial bank and the asset and wealth management group make up the rest.

Anchored in its private bank, JPMorgan is the market leader in very large net assets, serving approximately 8% of families with $ 25 million or more. Dimon sees an opportunity in families with 5 to 25 million dollars, where the share of the bank is only 1%.

This could be difficult without a large brokerage platform, such as Morgan Stanley and Merrill Lynch from Bank of America. But Dimon says JPMorgan can grow in its own way. "More branches, better products and technologies, and more people in touch with customers, help us get there," he says. The bank employs the 3,500 financial advisors at its branches who served clients with assets under $ 5 million, as well as the 3,000 who manage the activities of the very large net worth.

JPMorgan's loan growth has moderated over the past year, reaching 4% in the first quarter. Dimon says that he would even be willing to witness a decline if it was necessary to avoid taking excessive risks.

"We tell our management that we have no problem seeing loan books down," said Dimon earlier this year. Citing a comment from Buffett about the insurance industry, he said that it was sometimes better for the sales force to play golf rather than make new loans. we will not be stupid. He says the bank's enemies are "complacency, arrogance, and bureaucracy," warning employees that "there are some very ragged people who want to eat your lunch." It's a good thing, by the way. This is called capitalism.

Dimon expresses on many topics: stressing that the 2018 corporate tax cut is essential to make US companies more competitive, defending share buybacks against left-wing critics, to call socialism a "disaster" and assert in its 50-page annual letter to its shareholders that US trade complaints against China, such as intellectual property theft, are "substantial and real".

"He sees JPMorgan as his legacy. That's his identity, "says Mayo, of Wells Fargo, who jokes that Dimon could just as easily have JPM tattooed on his limbs. "How many people are recognized simply by their first names? Madonna, Prince?

Investors were reassured early in 2018, when the bank said Dimon planned to stay as chief executive for five years. Mayo wonders if Dimon could stay in the lead after the start of 2023, when he turns 67. "As long as he is healthy and engaged, we will not see Jamie go anywhere," says Mayo.

At JPMorgan's investor day in February, how long did he expect to stay at the top, Dimon said, "Five years, maybe four now." He could end up as the CEO of Walt Disney, Bob Iger, who postponed the date of his retirement. Iger, now 68, is expected to retire in 2021.

One of the disadvantages of Dimon is that by staying put, he has brought a number of senior executives from, some of them becoming general managers elsewhere. Still, the bank has the largest peers among its peers, including its co-chairs Gordon Smith and Daniel Pinto, as well as Marianne Lake, who recently stepped down as chief financial officer, where she was considered one of the Best of the industry. responsible for the bank's consumer credit activities.

This change could position itfinally to succeed Dimon, as his current position will give him operational experience deemed important for the highest position. If Lake, 49, takes over after Dimon leaves, she would be the first woman to run a large US bank.

Earlier this year, Dimon and other bank chiefs were heard at a congressional hearing on the issue of succession. They were asked if, in their opinion, a woman or a person of color would run their institutions in the next decade. Five raised their hand. Dimon does not have any. He then explained that the estate was not his decision and that Congress was not the right place to lay out the company's plans.

Dimon said, "It's a council decision. It is discussed at every council meeting with and without my presence. More than half of my immediate supervisors are women and the management committee has men and women who can lead the company today. And others will be able to manage it in the years to come. "

In addition to Mary Lake, Mary Callahan Erdoes, Head of Asset and Wealth Management, and Jennifer Piepszak, the newly appointed new Chief Financial Officer, are among the most influential women in JPMorgan's management.

Succession is a sensitive subject. According to Mayo, there is a risk that investors "who own the shares because of Jamie sell when he leaves".

There are other risks. Banks benefited from higher rates. They were able to pass on only a fraction of the market rate hikes on depositors, while getting higher yields on loans. If the Fed begins to cut rates later this year, this trend could reverse, putting pressure on banks' margins, even though lowering rates could stimulate economic growth.

At present, the credit environment can not be much better. By 2018, JPMorgan had only made $ 4.9 billion in chargebacks on a $ 1 trillion loan portfolio, and almost all of this was in its credit card portfolio. . Despite the losses, the cards are lucrative for JPMorgan, thanks to their high interest rates, above 13% on average. Last year, losses were minimal outside the card portfolio, and JPMorgan posted a slight overall increase this year.

John McDonald, a banking analyst at Autonomous Research, estimates that the earnings per share of the big banks will increase by 9% on average per year from 2018 to 2021, but that the bulk of this growth should come from redemptions. Investors are less enthusiastic about earnings growth driven by buybacks than gains from organic expansion.

The success of JPMorgan has been detrimental as some analysts and investors do not see the kind of recovery story that could happen at Citigroup and Well Fargo. "Well managed, but already optimized and premium transactions," writes McDonald to customers. He is neutral on JPMorgan.

JPMorgan trades at a higher price / earnings ratio than its competitors.
Goldman Sachs Group

(GS), Citigroup and Morgan Stanley report less than nine times the expected profits for 2019, but this reflects the disgust of investors for the shares of the big banks. The group has one of the lowest P / E ratios of any major industry.

According to Mayo, JPMorgan's earnings could increase by about $ 1 per share in each of the next three years, or about $ 10 in 2019, $ 11 in 2020, $ 12 in 2021 and $ 13 in 2022, which would move the action to $ 150. He finds that JPMorgan and other banks generate earnings gains through positive operational leverage, which means that revenues will grow faster than expenses.

Given all this, the JPM shares look like a good deal. Historically, he has paid to bet on the best franchises in his class led by the best managers of the group. That's why some savvy investors, including Buffett, are banking on JPMorgan Chase and Jamie Dimon.

Write to Andrew Bary at [email protected]