Financial Analysis of Jp Morgan Chase Bank Thesis

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JP Morgan Chase (NYSE: JPM) is a major global financial services firm. The present incarnation of the company was formed in 2000 when Chase Manhattan purchased JP Morgan. At the time the company was formed, it held assets of $660 billion, making it the third-largest U.S. bank after Citigroup and Bank of America. The deal brought together retail banker Chase with investment banker JP Morgan (Skillman, 2000). Such acquisitions are characteristic of the history of the company, with its oldest constituent bank being the Bank of Manhattan (est. 1799), which bought Chase National Bank in 1931. The JP Morgan operation began in 1895.

Today, JP Morgan Chase is a world leader in the financial services industry. It has assets of $2.2 trillion and has maintained its strength in both investment banking and retail banking. The two constituent firms have retained independent brands despite the merger (2008 JP Morgan Chase Annual Report). The company has been able to expand its asset base so rapidly as a result of its absorption of several companies over the past couple of years. In 2008, JP Morgan took advantage of the economic crisis to acquire the assets of a pair of major financial institutions -- Bear Stearns and Washington Mutual. The company in active in most areas of banking, and operates in 60 countries. However, the United States accounts for the bulk of their revenues and profits.Download full Download Microsoft Word File
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TOPIC: Thesis on Financial Analysis of Jp Morgan Chase Bank Assignment

2008 was a difficult year for JP Morgan. The bank's revenues declined 12.8%. Their revenues were growing rapidly throughout the 2000s but the pace had been decelerating for a few years. In 2005, revenues grew by 41.6%; in 2006 by 25.2%; in 2007 by 16.5%. Those growth rates are remarkable, so it stands to reason that they could not be sustained indefinitely. However, the move to a decline in revenue last year reflects the unexpected intensity of the recession. The loss of revenue is largely attributable to a steep decline in non-interest income. This category includes credit card fees, the dealer trading accounts, securities gains and other. Non-interest income declined 36.6% last year. All of the accounts posted normal returns. While some showed a lower rate of growth last year compared to other years, the key difference-maker was the dealer trading account. Dealer losses in 2008 were $10.7 billion, compared with dealer gains of $9 billion in 2007. The dealer trading account had until 2008 been a strong earner for JP Morgan. In terms of other revenue metrics, interest revenue increased slightly (+2.3%) last year, while interest expense declined (-23.9%). This indicates that in terms of revenues, JP Morgan's performance was a little sluggish but strong in 2008. Prior to 2008, revenues had been increasing rapidly in all categories.

In terms of profit, JP Morgan had been experiencing rapid profit growth. The outset of the financial crisis resulted in a slowdown in profit growth in 2007, from 70.3% to 6.4%. However, in 2008 the company's profit growth turned negative. They still made money, $5.6 billion, but in the previous year they had made $15.3 billion. The $19 billion swing on the dealer trading account accounts for more than the $10 billion less in profit, so the company had actually improved its operating performance aside from the dealer trading account. Another category that had a significant negative impact on the profits last year was the loan loss provision. This had ranged between $2.5 billion and $3.5 billion for during the 2004-2006 period. It began to increase in 2007 with the onset of what was then known as the subprime crisis, more than doubling to $6.8 billion. In 2008, it more than tripled do nearly $21 billion. This resulted in a sharp decrease in the interest before tax, from $22.8 billion in 2007 to $2.7 billion in 2008. The only upside to this is that JP Morgan did not have to pay tax -- its tax expense was recorded as ($926 million). The company had been accustomed to paying in the range of 30% tax.

JP Morgan's balance sheet has been steadily improving over the past five years. In 2004, the bank held $1.1 trillion in assets following the takeover of BankOne. This grew steadily throughout the next five years. In 2005 the growth rate was 3.5%; in 2006 it was 12.8%; in 2007 it was 15.6%; and in 2008 it was 39.2%. The strong growth in 2008 was attributable more to the acquisitions of Bear Stearns and WaMu than any organic growth. Indeed, liabilities in 2008 grew 39.6% in 2008. Liability growth over the preceding years had been as steady as asset growth. It was 3.8% in 2005; 13.2% in 2006 and 16.4% in 2007. This demonstrates that JP Morgan's liabilities were growing faster than assets in each of the past five years. As a result, their debt ratio has increased from 90.8% in 2004 to 92.3% in 2008. As a consequence of this upwards shift in leverage, the debt-to-equity ratio has also increased. In 2004 the d-e ratio was 10 times; in 2008 it was over 12 times in 2008. Note that on bank balance sheets the d-e ratio is not to be treated the same as it would be for another company, since banks hold liabilities as part of their operating model.

The bulk of JP Morgan's cash flows have derived from financing activities. Financing flows have grown rapidly over the past five years. The exception was in 2005, when financing flows declined. Since then, they have increased 273% in 2006, -14% in 2007 and then 79% in 2008. These changes mirror, approximately, the rates of increases in deposits. The one exception was 2007, which saw an increase in deposits but a decrease in Fed Funds/REPOs. In total financing flows have increased an average of 64% over the past five years.

Cash flow from other activities illustrates the reason why cash flow turned negative in 2008. Cash flow from investing activities - the primary means by which banks make money -- decreased sharply in 2008. Over the past five years, investing flows had remained relatively steady, but in 2008 investment cash flows dipped to -$286 billion, compared with -$73 billion the year previous. This drop was not normal in the context of the past five years and is largely attributable to the purchases made of other financial institutions.

In banks, cash flows from financing and investing essentially offset one another. This is the process of collecting deposits and making loans or investments to earn interest on the deposits. Cash flow from operating activities is somewhat outside of this loop, but represents the impact of some of the other sources of operating income, changes in working capital and the gains/losses on securities. In the case of JP Morgan, cash flows from operating activities had been steadily deteriorating over the previous four years, but improved in 2008, turning positive. This was the result of improvements to working capital that were made in the year.

JP Morgan has poor margins relative to the industry. Last year, JP Morgan had a pre-tax margin of 4.1%; the industry enjoyed a 10.4% pre-tax margin. The lack of strong margin was not just a one-time event. Over the past five years, JP Morgan's pre-tax margin has averaged 21.2%, compared with 27% for the industry. The same trend occurs with net margin. JP Morgan last year had a net margin of 5.5%; the industry overall enjoyed a 9.5% net margin. Over the past five years, JP Morgan's net margin was 15.2%, compared with 19.7% for the industry.

JP Morgan is less highly leveraged than its industry peers. Its debt-to-equity ratio, as calculated by MSN Moneycentral using different metrics, is 3.86; the industry's is 3.06. However, JP Morgan has a leverage ratio of 13.0 compared with 15.5.

Returns on JP Morgan are generally weaker than those in the industry as a whole. The company underperformed last year with respect to return on equity at 2.3%, compared with 5.4% in the industry. Over the past five years, average ROE at JP Morgan has been 8.2%, compared with 13.1%. Return on assets last year was 0.2%; compared with 0.4%. Over the past five years JP Morgan has returned 0.7% on assets, compared with 0.9%. It is clear that JP Morgan is simply not as efficient as some its competitors in the banking industry.

Over the past five years, JP Morgan's earnings per share had steadily increased, from $1.87 in 2004 to $4.56 in 2007. This decreased in 2008 to its lowest level of the study period. The company has continued to pay its dividends, however, and these have increased over the past five years by an average of 2.3%. The company's stock chart for the past five years roughly mirrors its financial performance -- a steady incline followed by steep declines as the financial crisis deepened.

What we can conclude from this is that JP Morgan generally underperforms its industry peers and has struggled as a result of the recent economic downturn. The company underperforms the industry in… [END OF PREVIEW] . . . READ MORE

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