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JPMorgan Chase
Bo(Kate) Dong, Stephen Proffer, Gleb Zarkh
March 13, 2007
Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
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JP Morgan Chase
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One of the oldest and most prestigious financial
services firms in the world.
Headquartered in New York City, with assets of $1.3
trillion, JPMorgan Chase is currently the 3rd largest
banking institution in US (Behind Citigroup & Bank
of American)
Principle Bank subsidiaries:
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JPMorgan Chase Bank, National Association
Chase Bank USA, National Association
Principal Non-Bank Subsidiaries:
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J.P. Morgan Securities Inc.
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Chemical Banking Corp.
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New York Chemical Manufacturing Company was
founded in 1823 as a maker of various chemicals
In 1824, the company amended its charter to
perform banking activities and created the Chemical
Bank of New York
In 1996, the company acquired the Chase
Manhattan Corporation and kept that name
In 2000, the company acquired J.P. Morgan & Co.
and changed its name to J.P. Morgan Chase & Co.
JPMorgan Chase retains Chemical Bank's
headquarters and stock history.
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Chase Manhattan Bank
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The Chase Manhattan Bank was formed upon the
1955 purchase of Chase National Bank (established
in 1877) by the Bank of the Manhattan Company
(established in 1799), the company's oldest
predecessor institution. Led by David Rockefeller
during the 1970s and the 1980s
Chase Manhattan was one of the largest and most
prestigious banking concerns, with leadership
positions in syndicated lending, treasury and
securities services, credit cards, mortgages, and
retail financial services
Weakened by the real estate collapse in the early
1990s, it was acquired by Chemical Bank in 1996
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J.P. Morgan & Company
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In 1895, Drexel, Morgan & Co. became J.P.
Morgan & Co
It financed the formation of the United States
Steel Corporation, which took over the business of
Andrew Carnegie and others and was the world's
first billion-dollar corporation
In 1892, the company began to finance the New
York, New Haven and Hartford Railroad and led it
through a series of acquisitions that made it the
dominant railroad transporter
In the 1930s, JPMorgan was forced by the GlassSteagall Act to choose either commercial banking
or investment banking:
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JPMorgan chose to operate as a commercial bank
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JPMorgan Chase
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In 1990s and following amendments to the GlassSteagall Act, JPMorgan Chase had turned itself
into an investment bank too. It also offered
private banking and private equity services.
2001- Chase Manhattan acquired JPMorgan & Co.
to form JPMorgan Chase & Co.
In 2004, JPMorgan Chase & Co. acquired Bank
One
Bank One CEO Jamie Dimon becomes president,
COO, and designated successor of current
JPMorgan Chase CEO William B. Harrison
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Bank One
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Created 1998: Bank One of Ohio
merge with First Chicago
Result of over 55 mergers
J.P. Morgan Chase- aggressive
acquisition strategy
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Business under 2 brands
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Businesses use the JPMorgan brand:
Investment Bank
Worldwide Securities Services
Private Bank
Asset Management
One Equity Partners
Private Client Services
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Business under Chase brand:
(The U.S. consumer and commercial banking businesses serve customers
under the Chase brand)
Credit card
Small business
Home finance
Auto and education finance
Insurance
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Business Segments
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Investment Bank
Retail Financial Services
Card Services
Commercial Banking
Treasury and Securities Services
Asset Management
Corporate
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Segment Breakdown
J.P. Morgan 2006 Annual Report,
Pg. 35
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Investment Banking Market Share
IBED Pg. 34/ Pg. 37
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Investment Banking Financials
Record fees
Flat Net
Income
IBED Pg. 36
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Retail Financial Services
*Additional 339 Branches in New York Tri State (NY, NJ, CT)
from Bank of New York Aquisition
IBED Pg. 34/ Pg. 40
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Retail Services Financials
Weaker mortgage
results
Net Income down by 6%
IBED Pg. 38
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Card Services
IBED Pg. 34/ Pg. 44
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Card Services Financials
Fewer bankruptcy
filings
Net Income up 68%
IBED Pg. 43
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Commercial Banking
IBED Pg. 34/Pg. 47
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Commercial Banking Financials
Net Income
increase by 6%
IBED Pg. 46
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Treasury & Securities Services
IBED Pg. 34/ Pg. 49
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Treasury & Securities Financials
Driven by market
value appreciation
Net Income increased 26%
IBED Pg. 48
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Asset Management
$ 1.3 Trillion under management
IBED Pg. 34/ Pg. 51
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Asset Management Financials
Driven by market
appreciation
Net Income Increased 16%
IBED Pg. 50
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Corporate
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Private Equity, Treasury, Corporate Staff
units & expenses which are centrally
managed
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Corporate Financials
Wider net interest spread
Litigation expenses
IBED Pg. 53
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
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Economics
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Big Picture
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Interest Rate
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Big Picture Projection
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Global and domestic GDP growth will
remain flat or decline slightly
The U.S. economy showing some
weakening because of a challenging
housing market
Global economy doing relatively well
because of robust activity in Asia and
areas of the world that produce oil and
raw materials.
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Big Picture(2)-- GDP
U.S. Bureau of Economic Analysis.
March 12, 2006.
<http://www.bea.gov/briefrm/gdp
.htm>
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Big Picture(3)-- Consumer deposits
U.S. Bureau of Economic Analysis.
March 12, 2006.
<http://www.bea.gov/briefrm/savi
ng.htm>
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Economics
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Big Picture
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Interest Rate
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Interest rate (1)—Long-term interest
rate
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Longer-term interest rates have risen,
contributing to increased borrowing
costs for both households and
businesses.
Long-term interest rates rose but
were still moderate by historical
standards, and credit spreads and risk
premiums stayed narrow.
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Interest rates (Mortgage)
Bankrate.com. March 12, 2006
<http://bankrate.com/brm/graphs
/graph_trend.asp>
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Interest Rates (Prime)
Moneycafe.com. March 12,2006.
<http://bankrate.com/brm/graphs
/graph_trend.asp>
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
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Industry glance
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Mergers and mega-mergers; top 10 U.S. banks
control two-thirds of the lending market and
deposits
Advises on corporate strategy and structure,
raises capital, etc.
Make markets in financial instruments
Offers sophisticated risk management services
Sales and research across equity, debt, interest
rate, foreign exchange and commodity markets
Provides equity and mezzanine capital financing
to companies throughout the business
development life cycle
Sources: JP Morgan 2006 10 K
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
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RCMP Portfolio History
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Purchased on Oct. 6, 1999 as Bank
One for 700 shares
Cost of position- $24,237.45
Market value- $45,128.16
(+86.19%)
Currently own 924 shares
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JPM on S&P 500
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Comparable companies
JPM
BAC
C
WFC
Market Cap
162.45B 236.61B 249.52B
119.9B
Revenue (ttm)
56.29B
63.14B
79.78B
32.65B
Net income (ttm)
12.61B
19.44B
21.03B
8.23B
EPS (ttm)
3.532
4.344
4.646
2.42
PE (ttm)
13.26
12.13
10.93
14.68
PEG (5 year expected)
1.28
1.26
1.18
1.42
PS (ttm)
2.91
3.75
3.11
3.67
Price
$ 46.83 $ 52.69 $ 50.78 $ 35.53
Source : Yahoo! Finance
Industry
1,142B
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
RCMP
Model assumptions
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Step1:Calculation of Equity Cash
Flow
Step2: Calculation of Cost of Equity
Step3:Calculation of ROE
Step4:Calculation of the Equity
Value
Step5:Calcualtion of the Price per
share
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Step1:Calculation of Equity Cash
Equity cash flow
Net Income
=
2007
2008
2009
2010
2011
13,932
13,444
15,424
17,129
14,624
88
14,536
changes in equity
36,234
-5,545
19,066
15,199
equity cash flow
22,303
18,989
-3,642
32,328
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Step2: Calculation of Cost of Equity
Cost of equity=
Annualized
rf =
5.25%
β=
0.67
rm=
12.00%
ke=
9.77%
source:http://finance.yahoo.com/q/ks?s=JPM
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Step3:Calculation of ROE(1)
2004
2005*
2006
Net income
4,414
8,470
14,440
Total Equity (including Goodwill)
105,653
107,211
115,790
Goodwill
43,203
43,621
45,186
Total Equity (excluding Goodwill)
62,450
63,590
70,604
ROE including goodwill
4.18%
7.90%
12.47%
ROE excluding goodwill
7.07%
13.32%
20.45%
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Step3:Calculation of ROE(2)
2007
2008
2009
2010
2011
Net income
13,932
13,444
15,424
17,129
14,624
Total Equity (including
Goodwill)
118,997
113,452
132,518
117,319
117,407
Goodwill
45,397
45,796
46,007
46,445
46,775
Total Equity (excluding
Goodwill)
73,600
67,656
86,511
70,874
70,631
ROE including goodwill
11.71%
11.85%
11.64%
14.60%
12.46%
ROE excluding goodwill
18.93%
19.87%
17.83%
24.17%
20.71%
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Step4:Calculation of the Equity Value
Long-Term Growth Rate=
Year
3.50%
1
2
3
4
5
2007
2008
2009
2010
2011
Net income
13,932
13,444
15,424
17,129
14,624
equity cash flow
(22,303)
18,989
(3,642)
32,328
14,536
Distcount factor
0.911
0.830
0.756
0.689
0.627
Terminal Value
Terminal Value
0.627
239,859
PVs of Equity Cash Flow
-20,317
Total Enterprise Value=
174,555
15,758
-2,753
22,264
8,206
150,483
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Step5:Calcualtion of the Price per
share
Total enterprise value over
Shares outstanding
=Price Per Share
174,555
3,462
+ 10%
55.47
- 10%
45.38
50.42
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Outline
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History
Macroeconomic view
Industry glance
Past performance
Financial analysis
Recommendation
RCMP
Recommendation for JPM
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Hold 924 shares of JP Morgan Chase
-JPM owned a strong management
and stable strategy
-JPM continued focus on their retail
banking division
-JPM reduced the non-interest
expenses, especially the operating
expenses
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RCMP:
Gleb Zarkh
Email: [email protected]
Stephen Proffer
Email: [email protected]
Bo (Kate) Dong
Email :[email protected]
March 12, 2006
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