JP Morgan (
) 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 (
), UBS (
), Goldman Sachs (
), 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
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.
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
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