JPMorgan Chase Stock is a solid game with CEO Jamie Dimon

Once a decade ago as "too big to fail", the big US banks today are big enough – with abundant capital and enormous earning power to tear out any economic downturn. JPMorgan had a net income of $ 32.5 billion in 2018, more than any other US company next to Apple.

That kind of revenue, plus discounted market value and post-crisis stability, should make banking stocks more appealing. But that has not happened, which creates an attractive investment opportunity.

"The volatility of our performance is very low over time – even surprisingly, in corporate returns, where much of the revenue is consistent year by year," said Jamie Dimon, JPMorgan's chairman and CEO of a recent interview. He cited consumer bank and real estate and property management as two resilient areas. "The macro environment doesn't change anything we do," added Dimon. "We are investing through the cycle. The underlying economy is still OK."

The 63-year-old CEO, dressed in casual jeans and a dark blue shirt, spoke to Barron's at the Bank's temporary headquarters. in Midtown Manhattan. JPMorgan's old headquarters on Park Avenue is being demolished to accommodate a much larger replacement, to be completed by 2025.

Under Dimon, chief since 2006, JPMorgan has become the world's top bank with the industry's deepest management talent and highest returns.

Company strengths are underappreciated. It does not help that banks are classic values ​​in a market that increasingly favors growth companies. In fact, JPMorgan can be the most popular stock among securities.

The shares, recently at $ 1[ads1]10, traded 11 times and projected 2019 earnings of $ 10 per share and yielded nearly 3%. The bank is expected to increase its quarterly payout, reaching 80 cents per share, to around 90 cents, after the Federal Reserve publishes the results of its annual major bank stress tests later this month.

"Since the financial crisis, JPMorgan has taken market share almost every year in almost every business, adding up some of the best returns in the industry," said Jason Goldberg, an analyst with Barclays. He ranks JPMorgan as one of his top picks, with a price target at $ 140.

And if the Fed rates on interest rates, as expected this year – possibly at the June or July meeting – JPMorgan and other banks could be set to "feel like it's 1995", Mike reverses Mike Mayo, who refers to the end of a Fed tightening cycle 14 years ago. A reverse yield curve with short-term interest rates over long "can be reduced by an extension of the business cycle and potentially better lending growth," says Mayo.

Dimon Speaking often of JPMorgan's "Fortress" balance, while a bit of a stretch, given the bank's financial influence, he has a point, and since 2008, JPMorgan's specific equity base has more than doubled to $ 187 billion. while the assets have risen by only 25% to $ 2.7 trillion.

Like many of its competitors, JPMorgan returns almost all of its revenue to shareholders through dividends and share purchases in the year ending June 30. It is expected to do so again in the next 12 months. JPMorgan's total outstanding shares fell by almost 5% in 2018 and are in pace of falling by the same amount this year. Large banks have the best capital history of any industry.

Nevertheless, pessimism seems to be embedded in bank shares. For example, they may not have quite the earnings stability of electrical supplies, but they trade for half the price / revenue ratio of the hot sector and have comparable yields. And the banking group is trading at almost the lowest price, relative to the S&P 500 index, for 40 years.

"Just as the stock market was too optimistic about JPMorgan and the group before the financial crisis, it is unfortunately pessimistic now," claims Mayo.

An investor who does not accept the gloomy banking scenario is Warren Buffett. The
Berkshire Hathaway

(BRK.B) CEO, long a fan of Dimon, bought 59 million shares in JPMorgan valued at over $ 6 billion over the last three quarters-Berkshire's largest stock purchase in that range. The average price per share is about the current share price.

Buffett told CNBC earlier this year that he had been "stupid" for not buying JPMorgan earlier, given his admiration for Dimon and the franchise. And he suggested that, considering the bank's financial performance, its competitors peaked at 17% return on equity in 2018, the stock should act at least three times the book value, which would put them above $ 170. times handy book with almost $ 58 per share.

Berkshire has plenty of room to buy more of JPMorgan because it only has a 2% stake under 10% of a bank that regulators allow an investor to own. Buffett is probably the industry's biggest fan: Berkshire has significant bets in all major banks except
Morgan Stanley

(MS) and
Citigroup

(C). Berkshire is the largest holder of both
Wells Fargo

(WFC) and
Bank of America

(BAC), with almost 10% interest in each.

Another positive for the big banks is easier investigation from Washington after being crosshaired by federal regulators this year after the financial crisis 2008-09. On Thursday, the Fed said it had closed an enforcement action against JPMorgan due to major losses in 2012 as a result of trading a British employee known as "London Whale."

One of JPMorgan's primary assets is its leader, who is widely known in the industry as just "Jamie." He is among a handful of US CEOs – others include Buffett, Jeff Bezos too
Amazon.com

(AMZN), and Mark Zuckerberg off
Facebook

(FB) – who personifies their companies.

Dimon regularly says that while JPMorgan does not predict a recession, it is ready for one. He loves the bank's franchise and sees growth opportunities "everywhere."

JPMorgan is now No. 1 in credit card, investment bank and private bank and No. 2 in consumer deposits behind Bank of America. Having been stymied during the Obama administration, the bank began opening branches in new premises in 2018; It adds 400, at a cost of around $ 700 million, to cities like Boston, Philadelphia and Washington.

Supported by $ 11 billion of annual technology spending, JPMorgan expands its consumer-based digital banking services and pushes small and medium-sized banks. Its national deposit market share is up to 9% from 3.6% in 2006.

One reason why
BB & T

(BBT) and
SunTrust Banks

(STI), two of the largest regionals, decided to merge this year, were raising their technological spending to better compete against JPMorgan Bank of America and Wells Fargo.

"Goliath is winning," Mayo says.

Despite the construction work, part of Dimon's strategy is to shift transactions from relatively high branches to mobile banking. The bank has 51 million digital users, and consumers can open a JPMorgan account digitally in three to five minutes.

The company receives approximately 45% of the consumer bank revenue, which includes credit cards and mortgages, and an additional 35% from the corporate and investment bank, where the trading business is located. Commercial banks and the real estate and asset management group make up the rest.

Anchored by the private bank, JPMorgan is a leader in the market for ultra-high-net values, and earns approx. 8% of families with $ 25 million or more. Dimon sees the opportunity in families of $ 5 million to $ 25 million, where the bank's share is only 1%.

It may be tough without a broad broker platform, such as Morgan Stanley and Bank of America's Merrill Lynch. But Dimon claims that JPMorgan can achieve growth in its own way. "More branches, better products and technology, and more customers facing customers help us get there," he says, using the 3,500 financial advisors in his branches serving customers With less than $ 5 million in assets, as well as the 3,000 who handle the ultra high net worth business,

JPMorgan's loan growth has been moderate over the past year and ran at 4% in the first quarter, Dimon said he would be willing to see decline, if necessary to avoid taking unnecessary risk. "" We tell our management that we have no trouble seeing loan books shrink, "Dimon said earlier this year. Citing a comment from Buffett on insurance industry, he noted that sometimes "you better have the sales force play golf than make new loans; We're not going to be stupid. "He says the bank's enemies are" complacency, arrogance and bureaucracy, "warning employees that" there are some very screaming people out there who will eat your lunch. That's a good thing, by the way. It is called capitalism. "

Dimon is stated on many topics: praising 2018 corporate tax cuts as crucial to make US businesses more competitive, defending stock purchases against critics on the left, blasting socialism as a "disaster" and in its 50-page annual shareholder letter that US trade complaints about China, such as the theft of intellectual property, are "substantial and genuine."

"He views JPMorgan as his inheritance; That's his identity, says Wells Fargo's Mayo, who jokes that Dimon may also have JPM tattooed on his limbs. "How Many People Are Recognized by Their First Names? Madonna, Prince?"

Investors were comforted in early 2018 when the bank indicated that Dimon was planning to continue as CEO for another five years. Mayo is wondering if Dimon could remain the boss of early 2023 when he would strike 67. "As long as he is healthy and committed, we don't see Jamie go anywhere," Mayo says.

Asked on JPMorgan's investor day in February how long he planned to remain in the top job, Dimon said, "Five years, maybe four now." He may end up as Walt Disney, CEO Bob Iger, who has pushed out his retirement date. Iger, now 68, is due to go down in 2021.

One of the banks against Dimon is that by continuing he has led a number of senior executives to leave, while some continue to be directors elsewhere. Yet, the bank has the deepest bench among its peers, including co-chairmen, Gordon Smith and Daniel Pinto, and Marianne Lake, who recently moved from being CFO, where she was considered one of the industry's best leaders in managing the bank's consumer lending business.

That shift could position her to succeed lately, Dimon, because her current job will give her operating experience seen as important to the top post. If Lake, 49, takes over after Dimon leaves, she would be the first woman to lead a leading US bank.

Earlier this year, Dimon and other bank managers were pushed for the success problem by a congressional hearing. They were asked if they believed that a woman or a person of color would lead their institutions within the next decade. Five raised their hands; Dimon didn't. He later explained that success was not his decision, and that Congress was not the right place to lay out company plans.

Dimon said: "It is a board decision. Every board meeting discusses with and without me present. Over half of my older direct reports are women, and it is men and women in the operating committee who can run the company today. more can drive it in the years to come. "

In addition to Lake, other top women in JPMorgan's management ranks are Mary Callahan Erdoes, property and asset management manager, and Jennifer Piepszak, the newly-installed finance director.

Mission is a sensitive subject. It's a risk, says Mayo, that investors "who own the shares due to Jamie sell when he leaves."

There are other risks. Banks have benefited from higher prices. They have been able to forward only a fraction of the market increases to depositors while receiving higher returns on loans. If the Fed begins to cut prices later this year, this trend may reverse and push the bank's margins, even if a price fluctuation could stimulate economic growth.

Currently, the credit environment cannot be much better. JPMorgan only had $ 4.9 billion in repayments in 2018 on a $ 1 trillion loan portfolio, and almost all of that came into the credit card portfolio. Despite the losses being short lucrative for JPMorgan, thanks to the high interest rates averaging over 13%. Loss last year was minimal outside the card portfolio, and JPMorgan sees a small overall increase this year.

John McDonald, a banking analyst at Autonome Research, sees average annual growth in major bank earnings per share of 9% from 2018 to 2021, but most of this comes from buybacks. Investors are less excited by buyback-driven earnings growth than gains through organic expansion.

JPMorgan's success has worked against it, because some analysts and investors do not see the kind of recovery story that could play out at Citigroup and Well Fargo. "Well-known, but already optimized and acting for a prize," McDonald wrote to clients. He's neutral on JPMorgan.

JPMorgan trades at a higher price / income ratio than its peers.
Goldman Sachs Group

(GS), Citigroup and Morgan Stanley earn less than nine times expected 2019 earnings, but it reflects investors 'dislike of large banks' stocks. The group has one of the lowest P / E figures in any major sector.

Mayo says JPMorgan's earnings could rise by around $ 1 per share in each of the next three years, beating around $ 10 in 2019, $ 11 in 2020, $ 12 in 2021, and $ 13 in 2022, lifting the stock Over $ 150, he sees JPMorgan and other earnings-producing banks thanks to a positive operating profit, which means revenues will grow faster than spending.

Given all this, JPM shares look like a bargain. Historically, it has paid for betting on top-class franchises, led by best-in-group leaders. Therefore, some skilled investors, including Buffett, are beating JPMorgan Chase and Jamie Dimon.

Write to Andrew Bary at andrew.bary@barrons.com