Concerns on JP Morgan's Retail Banking Persist

By Trefis Team,

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JP Morgan ( JPM ) reported its net income of $17.4 billion for the year 2010, an increase of 48% compared to the previous year and even higher than $15.3 billion net income generated in 2007. It may seem that JP Morgan has emerged strongly out of financial crisis with a significant rise in net income but a closer look at JP Morgan's earnings didn't show the kind of growth in business for which investors have been hoping. JP Morgan is first to release earnings this year ahead of its competitors like Bank of America ( BAC ), Wells Fargo ( WFC ), UBS ( UBS ), Goldman Sachs ( GS ), Deutsche Bank (DB) and Morgan Stanley (MS).

We have a price estimate of $48.62 on JP Morgan's stock which is about 8% above the current market price.

We Give Earnings a B - Constructive Outlook but Concerns Linger

JP Morgan's $17.4 billion in earnings last year was supported by release of about $7 billion in pretax reserve which were kept to cover bad debts. Pre-provision profits have actually declined by 14% to about 41.5 billion. Although it is good that JP Morgan expects fewer defaults on its loans and have decreased the provisions for credit losses but according to the CEO of JP Morgan, Jamie Dimon, this doesn't count as actual earnings. JP Morgan's total revenues increased marginally by 2% to reach $102 billion in 2010 while expenses increased by 17% to reach $61 billion.

Retail Banking Net Income Declined On Lower Deposits

The retail banking division of JP Morgan serves small businesses and consumers by providing traditional banking services to them through their various branch locations, ATM's, online banking etc. The bank makes money by charging interest on loans and levying fees such as overdraft charges, ATM fees etc. Retail banking is the largest source of value for JP Morgan and constitutes about 19% of its stock price in our analysis.

JP Morgan's retail banking net income declined by 7% in 2010 compared to previous year as its average loan deposits declined to about $339 billion in 2010. The average loan deposits was boosted to $341 billion in 2009 after acquisition of Washington Mutual by JP Morgan. We estimate that average deposits will improve going forward on higher personal savings rate in the U.S. and improvement in services.

Click here to view our full analysis of JP Morgan.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: BAC , GS , JPM , UBS , WFC

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