J P Morgan Chase (JPM)

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Tracey Shi

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JPMorgan Chase & Co. (NYSE: JPM) is one of the largest financial institutions in the United States. Its main services include the provision of credit cards and loans and other financial services to both commercial and individual customers in addition to the underwriting of new debt and equity issuance through its investment banking division. The firm has a significant amount of international exposure, with operations in over 50 countries and clients in every major financial market in the world. ^[1] JP Morgan Chase reported a full-year 2010 total revenue of $115.5B and a net income of $17.4 billion^[2]

Business Overview

Investment Banking (25% of 2010 Net Revenue)

Investment banking is JPMorgan Chase's chief operation. The investment bank is employed by clients running the gamut from large corporations to governments to financial institutions. JPMorgan offers a wide range of financial services, including risk management, corporate advising, trading and market-making (enabling transactions between buyers and sellers of cash securities and derivatives), capital raising in equity and debt markets, and research. The investment bank is also responsible for investing and trading with the firm's own capital.^[2]

Retail Financial Services (30.3% of 2010 Net Revenue)

JPMorgan Chase has the third-largest deposit base in the U.S., and has the largest market share in large cities like Chicago and New York, with the acquisition of Bank of New York's operations. The firm also operates the third-largest ATM network in the United States and the nation's fourth-largest branch network. ^[2]

Credit Card Services (16.4% of 2010 Net Revenue)

Chase Card Services, JPMorgan's credit card services business, is the second-largest domestic issuer of Mastercard (MA) and Visa (V) cards. Chase Card Services has focused on expanding its network of private-label cards, which are cards issued by a specific retailer and are accepted only by the issuing retailer. Chase's current partners include BP (BP), Circuit City (CC), and Kohl's (KSS). Chase also issues cards jointly with various organizations, including Walt Disney Company (DIS), AARP, Marriott (MAR), Sony (SNE), and Amazon.com (AMZN). Private-label cards, while they offer better growth opportunities than traditional bank-issued cards, typically experience higher rates of delinquency, which adds additional risk to Chase's private-label expansion.

Asset Management (8.6% of 2010 Net Revenue)

JPMorgan's asset management division provides retail investors, institutions, and high-net-worth individuals worldwide with investment and wealth management. The division's products and services include management of equities, hedge funds, real estate, fixed income, and private equity investments, as well as trust and estate services for its high-net-worth clients.

Treasury & Securities Services (7% of 2010 Net Revenue)

Treasury Services provides cash management, trading, and other services to corporations, financial institutions, and government entities. Securities Services holds, values, and clears securities, cash, and alternative investments for investors and broker-dealers, essentially facilitating transactions on stock markets across the world.

Commercial Banking (5.8% of 2010 Net Revenue)

Commercial banking is a small but strong component of Chase's business. This division provides a range of banking services to corporations, government agencies, non-profits, and other financial institutions.^[2]

Corporate/Private Equity (7% of 2010 Net Revenue)

JPMorgan Chase's Corporate/Private Equity division, J.P.Morgan Partners, LLC offers fund administration services to private equity funds, institutional limited partners, real estate funds, infrastructure funds, funds of private equity funds, distressed debt and hybrid funds.^[2]

News Updates

In June 2010 JP Morgan agreed to pay $153.6M to settle charges that it misled buyers on the purchases of complex mortgage investments. While this seems like a relatively large sum of money, it may singal the extent of lawsuits that the company may face after the crisis. This is relatively small compared to the size of JP Morgan.^[3]

Trends and Forces

Downturn in US Economic Cycle

JP Morgan Chase is focused in the United States and changes in spending habits of Americans effects its credit card business. Beyond the credit card industry, JP Morgan's other services rely on a strong economic performance.^[4][5]

Interest Rates

Rising interest rates raise the cost of borrowing for all lenders, dampening the overall demand for mortgages and other home loan products. In addition, JP Morgan makes money by charging a spread between the rate in charges its customers and the rate it incurs to get the money. While JP Morgan can change the rate it charges to high enough for it to maintain a profit margin, as interest rates rise, the demand to borrow will fall. By contrast, lower interest rates increase the volume of demand.^[6][7]

Consumer Payment Means

U.S. consumers have increasingly used credit cards to pay for more purchases than cash or checks, a trend that continued since then. In addition to credit cards, debit cards and electronic payments (like PayPal) have taken market share away from more traditional means of payment. One particular technology driving increased usage of credit cards is contact-less payments which do not require a swiping through a machine. The continued adoption of credit cards helps JP Morgan Chase's credit card segment.

Government Regulation

JP Morgan Chase may be subject to a number of different changes or additions to the current regulation on the financial industry. These changes may impact the company's operations and prevent it from achieving the same level of profits it has in the past.^[8]

First, All holding banks may be prevented from engaging in proprietary trading and in any trades where there is a "material conflict of interest". In addition, "material exposure to high-risk assets or high-risk trading strategies" will be banned. While the impact may be large, the true extent depends on the interpretation and implementation of the regulation.^[9]

The Basel III rules will force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.^[10]

Other regulation may place limits on the extent to which banks may invest in hedge funds or in private equity funds. This is commonly referred to as the Volcker Rule.^[11] In order to improve their returns, JP Morgan, like many of its peers, invests in organizations like hedge funds and private equity funds. These funds tend to have higher returns, but also tend to be higher risk. While the regulation aims to lower speculation and high risk investments, it may also prevent JP Morgan from achieving the returns it has historically gotten. Swaps, which are used by banks to offset their risk or hedge against potential outcomes, may also be regulated. This would prevent banks from taking certain positions because the risk would be too high without the possibility of a swap.^{[12] [13][14]}

The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. This new regulation may deter customers, but also may increase the cost of operation for JP Morgan.^[15]

Competitors

As a holding bank, JP Morgan competes with a different set of companies including:

• Bank of America (BAC): is a large, diversified financial company which competes with JP Morgan in a number of ways including the credit card issuance, asset management, and the financial services.
• Citigroup (C): like Bank of America, competes with JP Morgan across a number of different segments.
• Wells Fargo (WFC):competes with JP Morgan in its credit card and deposit bank side most importantly.
• American Express Company (AXP): runs a credit card issuance program with competes with JP Morgan's
• Goldman Sachs Group (GS): operates a asset management business which competes with JP Morgan's.
• Morgan Stanley (MS): like Goldman Sachs, Morgan Stanley operates an asset management business which competes with JP Morgan.

References

1. ↑ JPMorgan Chase 2008 Annual Report Selected Financial Data
2. ↑ ^{2.0 2.1 2.2 2.3 2.4} BusinessWire "JPMorgan Chase Reports Fourth-Quarter 2010 Net Income of $4.8 Billion, up 47% over Prior Year, on Revenue1 of $26.7 Billion; $1.12 Earnings Per Share" 1/14/11
3. ↑ Seeking Alpha "JPMorgan to pay $153.6M to settle fraud charges" 21 June 2011
4. ↑ About.com The US Economy "GDP Current Statistics"
5. ↑ Forbes Business "US ECON: CBO's 2009 Outlook Worsens, Sees 1.5% GDP Drop" 20 March 2009
6. ↑ Bloomberg.com, US Rates and Funds
7. ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
8. ↑ The Washington Post "Financial regulation bill nears finish line with support from Snowe, Brown" 13 July 2010
9. ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 2
10. ↑ The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10
11. ↑ Business Insider "Morgan Stanley Will Take Huge Loss On FrontPoint Because It's Bleeding Money On Losses And Lobsters" 8/5/10
12. ↑ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital'
13. ↑ The Options Insider "Permissible Bank Derivatives Trading" 2010
14. ↑ "Chase expects credit card law to mean $750M cut," 4/1/10
15. ↑ The Street "Feds Push Banks on Money Laundering" 9/27/10