JP Morgan (
) is one the largest and most diversified bank in the U.S.,
and offers services such as retail banking, commercial banking,
asset management, investment banking, consumer lending and credit
cards. Its main competitors include Bank of America (
), Goldman Sachs (
), Deutsche Bank (
) and Morgan Stanley (MS).
JP Morgan has benefited from a decline in provisions for credit
losses that raised operating margins for its retail banking
business. However, a weak economic recovery has resulted in a
decline in average interest earning deposits and presents a
potential concern for the multinational bank.
Here we explore upside and downside scenarios for JP Morgan's
retail banking business, which accounts for 19% of our
stock price estimate. Our JPM price estimate currently stands above
3% Upside - Decline in Provision for Credit loss
JP Morgan's provision for credit losses for its retail banking
segment declined by nearly 47% in 2010 to reach $607 million. The
improvement in provision for credit loss can be attributed to a
decline in adversely classified loans due to a better economic
outlook. Reduced provisions caused operating margins for the retail
business to rise from 33.6% in 2009 to 34.1% in 2010.
We estimate that this operating margin will remain stable at its
current level during our forecast period. However, there could be a
potential 3% upside to our price estimate for JP Morgan if further
declines in provisions for credit losses (sparked by an effort to
minimize its risk and adopt stricter loan standards) push retail
banking operating margins towards 40%.
5% Downside - Decline in Average Deposits
Average deposits, which refers to the total average value of
checking, savings, time and other deposits held by JP Morgan in
their retail financial services group, declined marginally from
$341 in 2009 to $339 billion in 2010.
Notably, average deposits increased at a striking 21.5% annual
rate over the three years prior to 2009. The acquisition of
Washington Mutual in September 2008 helped JP Morgan raise its
average deposits, and we expect the deposits to continue to
increase towards $545 billion by the end of our forecast period.
There is a 5% downside to our price estimate for JP Morgan,
however, if a weak economic recovery stifles the growth of average
deposits, leaving this number at $400 billion at the end of our
forecast period (vs. our $545 billion base estimate).