Acquisitions: JPMorgan (JPM) is only paying $10/share for Bear Stearns stock. This is the same company that was trading north of $150/share a year ago and was still being sold for more than $50/ share on Friday morning - the same day that Bear Stearns was telling analysts that its book value is $80/share.
If that's true, JPMorgan is getting a hell of a deal. For under $250M they are buying an 85 year old company with oodles of relationships. Yes, it has has $33B of total mortgage-related holdings, but even if all that exposure goes bad and the book value of $80/share is reasonably tangible, they still come out way ahead. And what if things are worse than everybody expects? Well, the Federal government is making this transaction virtually risk free for JPM by guaranteeing it!
JPM acquired Washington Mutual and has worked to close down 57 branches in the Chicago area. They also have been working to trim down WaMu and make its assets more profitable.
Furthermore, the acquisition of Bank of New York's retail and small business banking network has improved JPMorgan Chase's competitiveness in the New York/New Jersey region and increased Chase's consumer base and deposits.
By trading over-the-counter fixed-income derivatives, JPMorgan Chase & Co. (JPM) generated $5 billion in profits last year, Bloomberg reported citing two sources. The unit was among the most profitable for the company.
Moreover, the 3rs Quarter saw a net income of $527 million, compared with net income of $3.4B in the 3rd quarter of 2007. Revenue on the other hand was $4.0 billion, an increase of $1.1 billion, or 37%, from the prior year.
JPMorgan’s mortgage business was cited as responsible for the yearly decline in profits. CEO James Dimon admitted that the bank’s decision in 2007 to expand into mortgages was “wrong”. The ratio of prime mortgage charge-offs to total prime mortgages rose to 0.95% from 0.05% a year ago. Unfortunately, the situation could get worse as the U.S. housing market shows no signs of improving.
The credit problems extended to JPMorgan’s credit card business, where the charge-off rate jumped to 4.98% from 3.62% a year ago, leading to a 67% drop in earnings from the unit. Although management claimed that the Bear Stearns acquisition would be accretive, profit from the investment banking unit “could have been a couple hundred million higher had it not been for including the Bear Stearns.”
Not as bad as feared = confidence builder for investors
As bad as these numbers look, JPMorgan didn’t have a major nasty surprise in its earning report. Investors are able to take a breather now.
JPMorgan Chase & Co (JPM) beat first-quarter estimates, and its Chief Executive said it has the money to repay the $25 billion the bank borrowed from the U.S. government.
After dividends, the second-largest U.S. bank reported net income of $1.52 billion, or 40 cents a share, on $25 billion in revenue.
Investors have been cautiously cheering the performance of the financial sector, whose enormous losses led the stock market into decline. JPMorgan’s quarterly earnings report – like that of Goldman Sachs Group Inc. (GS) and rosy estimates from Bank of America Corp. (BAC) – serves as another psychological prop to jaded investors.
Perhaps the biggest surprise was JPMorgan CEO Jamie Dimon’s claim that the Wall Street bank has the resources to pay back the $25 billion it borrowed from the U.S. Treasury’s Troubled Asset Relief Program (TARP). Earlier this week, Goldman Sachs sold $5 billion in shares to repay half of what it borrowed from TARP.
JPMorgan’s investment banking business was a large driver of profits, bringing in a record $8.3 billion in revenue, including $4.9 billion from fixed-income trading alone. The investment-banking arm brought in $3 billion during the same period last year.
“It is almost certain we will see no improvement in those numbers for the next three quarters, probably through the middle of next year,” Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, said in a Bloomberg TV interview.
JPMorgan Chase has been able to expand around the world, serving a diverse group of clients with a wide variety of services.This helps hedge against the risks of any one of the firm's division failing, or the downturn of the U.S. economy.
Moreover, the bank was relatively less active in mortgages and picked up a heavily subsidized investment-banking bargain in Bear Stearns. The company took $33.3B in writedowns, losses, and credit loss provisions - far less than many of its rivals. JP Morgan is already making preparations to repay its $25B loan it took through the Troubled Asset Relief Program (TARP). The results from the government's stress test confirm that JPMorgan is in a strong position. The report stated that JPMorgan did not asked to raise anymore capital while some of its competitors like Citigroup, Bank of America, and Wells Fargo will not fair so well.
Citigroup announced that JPMorgan is in a strong position to handle the repayment of the Troubled Asset Relief Program (TARP) loans. Citi said that JPM would not have to issue equity to raise money to pay off the loans and would be financially able to repay them as soon as the end of 2009. This position will put JP Morgan ahead of other investment banks and in a better position in the future.
Since merging with Bank One in 2004, JPMorgan Chase's returns have been steadily increasing. The merger helped JPMorgan diversify to cover all aspects of the financial market, which has boosted its market share and earnings.
Top Contributor: N L | Created when NYSE:JPM was $26.05 | Edit | History
U.S. securities regulators are working on an updated version of the uptick rule. Members of the U.S. Securities and Exchange Commission are scheduled to meet April 8 to consider short sale price test proposals. This will be a huge lift to JPM along with all financial institutions.
A brief look at the AIG collateral payout on credit derivatives shows how little exposure JPM had to AIG. Even though JPM was the firm that invented CDS, it has fared rather well in this market showing its understanding and control of risk.
A year after Andrew Rabinowitz yanked his hedge fund's cash from Bear Stearns Cos. because of concern the Wall Street firm wouldn't make good on its trades, he's ready to return.
For Rabinowitz's New York-based Marathon Asset Management LLC, the lure is a prime brokerage that's now part of JPMorgan Chase & Co., whose $1.6 trillion balance sheet is more than four times the size of Bear Stearns's. JPMorgan Chief Executive Officer Jamie Dimon is counting on customers like Rabinowitz, some of whom helped bring Bear Stearns to its knees in March, to make his $1.36 billion takeover worthwhile.
JPMorgan is going to make a success of this business, said Robert Sloan, managing partner of New York-based S3 Partners LLC, which provides financing for hedge funds. ``They're going to get some clients back. There aren't that many players at the table.
JPMorgan, the biggest U.S. bank by market value, climbed three spots to second place among global merger advisers, after tightened credit markets snuffed out a boom in leveraged buyouts, according to data compiled by Bloomberg.
``Right now, credit access is everything, said Frederick Lane, a former co-head of mergers at Donaldson, Lufkin & Jenrette who now runs Boston-based Lane Berry & Co. For commercial banks, ``the current credit cycle has had the unexpectedly countervailing effect of giving them some advisory business.
Bankers are vying for fees amid a 21 percent decline in M&A since last July, when the collapse of the leveraged-loan market made it expensive for private equity firms to finance the biggest takeovers with high-yield, high-risk debt. Total deal volume dropped to $3.29 trillion in the past four quarters from $4.15 trillion in the previous period, Bloomberg data show. Leveraged buyouts shrank to $351 billion from $972 billion.