JP Morgan: a Fortress of a Balance Sheet

JP Morgan caught my eye following the bankruptcy of Lehman Brothers in 2008.   While large icons in the banking industry like Citibank ran for cover, JP Morgan stood tall among its peers. Like a true gentleman that knew it had prepared well for the coming storm.

One of the positive effects of a market crisis is that it brings to light bad practices of companies - heavy risk taking, shifting questionable assets,  and loose controls among others.  In my mind, only JP Morgan stood the test.  Big thanks to its leader Jamie Dimon. While its peers concentrated on gaining profit after profit without giving much thought to risk management pre-Lehman times, Jamie concentrated on creating a "fortress balance sheet". He consolidated its operations with a focus on profitability but all the while with an eye on risk control on each of the bank's individual business lines.  And his efforts were rewarded when  the most serious financial crisis of our time hit the streets. Although JP Morgan also partook of the Troubled Asset Relief Program, a lifeline offered by the U.S. government to ailing banks, it was also FIRST to pay its loan back.  Many in the industry guessed that JP Morgan only took the handout to avoid being put in the spotlight.  (Imagine, all its peers are taking a loan from the government except them. That would draw a lot of attention to them and may attract the bureaucrats to audit them needlessly) .  It was also the FIRST bank to raise its dividend payout to investors after the Lehman crisis.

But its stock price still took a hit in 2008, just like all the banks in the U.S.. Many institutional investors, controlled and regulated by their own internal policies, were forced to sell their bank stocks. So when JP Morgan was selling below 20, I knew in my heart it was an irresistible bargain. Unfortunately, I didn't have a brokerage account then.  I just had it now and I'm buying at $28 - by all means still a bargain in my mind.

It is not immune to the industry's ills, however. Like its peers, the bank is plagued by weak consumer loans, exposure to the troubled European notes (though limited to only $15B), and low investment banking activities. All these are causing some strain on the bank's bottom line.  Still, the bank reported  $4.3billion in gains in the 3rd quarter  ($1.02 per share) on the back of robust growth in commercial loans.

 JP Morgan remains well-capitalized. It has enough  resources to withstand another recession if it comes.  Its leader, Jamie Dimon, has transformed the bank into the most integrated and well-managed financial powerhouse it is today, and his keen attention to detail and long-term strategic thinking will ensure that JP Morgan retains its pre-eminent status well into the future.

Bank of America: To Buy or Not to Buy

Bank of America closed at $5.49 today.

Im so tempted to buy it.  But let's review its fundamentals to put our decisions in line.


  BofA is one of the largest financial institution in the U.S. and of the world.  Its size can be viewed both as an opportunity and a problem.  It offers a wide spectrum of services and products from asset management, consumer loans to wealth management and investment banking.  It means they can very well execute economies of scale and achieve cost advantages.  But then historically, institutions of this size have proven difficult to manage , and what's dragging the BofA further down is its $2 trillion in mortgages when it acquired Countrywide in 2008.

   BofA needs to raise capital for the next several years to comply with Basel III.   As of June 30,2011, BofA's balance sheet held $1.4 trillion in risk-weighted assets, with only $115 billion in Tier 1 common capital.  Risk-weighted assets will increase substantially under Basel III, while certain items will be deducted from capital.  These changes will reduce the company's 8.2% Tier 1 common equity ratio, making it harder for the company to reach the 9.5% + ratio it hopes to achieve.

  Finally, aside from BofA's problems of possible legal claims and erosion of capital (which  are considered serious even when operating in a stable market environment), the bank is facing the same headwinds as other financial institutions.  Demand for loans remains weak.    Low, flat yield curve would result to lower interest margins.  And its wide consumer base makes it vulnerable to the continued deleveraging in the U.S..

   But looking at the charts, it is at its lowest range now.  And its P/E ratio is at 3, compared to the P/E ratio of its peers at 9.  This stock is indeed cheap now.  But should you decide to invest in BofA stock, prepare yourself for a rough roller coaster ride.  Every time there is a court battle over the mortgage claims of investors, this stock will dive.  And then at quarter end, when it announces its earnings, its price will rise again.  Some would see this as a frightful scenario, especially if you start computing its financial ratios that include the standard deviation.  But for some, this is an opportunity to make some money.  

   Good luck!