In case you missed it, something big happened in the banking world last week.
Silicon Valley Bank (SIVB), a favorite bank of tech startups, went bust after a massive run on deposits and a failed attempt to raise capital.
This was the worst bank failure since the 2008 crisis. You may be wondering what this means for other banks and your investments. Well, don’t worry. I have done some research and analysis for you.
In this article, I will focus on JPMorgan (NYSE:JPM), one of the most resilient and profitable banks in the industry.
I will show you why JPMorgan has a strong balance sheet and income statement that can withstand any market turmoil.
I will also explain why JPMorgan is poised to grow and prosper in the future. And finally, I will tell you why now could be a great time to buy JPMorgan shares at a bargain price.
Trust me, you don’t want to miss this opportunity.
For your information, JPMorgan stock has gained about 1.5% in the past year, while the S&P 500 has lost about 9%. That’s impressive!
Built like a fortress
I know what you’re thinking: who wants to look at a bank’s balance sheet?
It’s complicated and confusing.
You have to deal with all kinds of financial products and instruments that don’t fit into neat categories like they do for a manufacturing company.
But trust me, it’s worth it. Because when you look at JPMorgan’s balance sheet, you see something amazing: a fortress.
As of December 2022, JPMorgan had more than half a trillion dollars in cash deposits with other banks. Most of that money was sitting with central banks like the Federal Reserve.
That means JPMorgan has access to the safest and most liquid form of cash.
Sure, they reduced their deposits a bit from December 2021. But that’s because they shifted some money to ‘federal funds sold and securities purchased under resale agreements’.
That’s just a fancy way of saying they lent out some money using U.S. Treasuries as collateral and earned higher interest rates. That’s smart.
Another thing I want to show you is why I’m not worried about JPMorgan’s investment securities portfolio.
This is part of their balance sheet where they hold bonds and other securities that generate income.
As of December 2022, JPMorgan had $629.3 billion worth of investment securities with an average credit rating of AA+.
That’s very high quality.
You may remember that SVB’s downfall was partly caused by their risky bets on ‘overvalued treasury securities’. They used their client deposits to buy these bonds at high prices and then lost money when the prices fell.
Well, JPMorgan was much smarter with their deposits. They didn’t grow them too fast or too much like SVB did.
From Dec 2019 to Dec 2022, J.P. Morgan’s deposits only increased by about 50%, from $1.56 trillion to $2.3 trillion.
That’s a reasonable and sustainable growth rate that doesn’t expose them to unnecessary risks.
There’s more to JPMorgan’s financial strength than just their balance sheet.
I also want to show you how they reduced their debt and increased their profitability in 2022.
JPMorgan managed to cut down their short-term borrowings and long-term debt from $54 billion to $44 billion and from $301 billion to $296 billion respectively.
That’s impressive.
And they did that while keeping their deposit base fairly stable.
What does that mean for JPMorgan? It means they have more cash than debt.
A lot more.
In fact, if you subtract their financial liabilities from their financial assets, you get a net-cash position of $688 billion!
That’s huge!
Thriving Profitability On The Backdrop Of NIM Expansion
But wait, there’s more.
JPMorgan also made a lot of money in 2022 thanks to rising interest rates. You may think that higher rates are bad for banks, but that’s not true.
Higher rates mean higher margins for banks like JPMorgan. They can charge more interest on their loans and earn more income from their securities.
For the full year 2022, JPMorgan’s revenues grew to $122.3 billion and the bank’s pre-tax earnings reached $46.2 billion.
That’s close to the highest level in over a decade.
And the best part is that JPMorgan expects to make even more money in 2023.
They think their net interest income will grow from $72 billion in 2022 to $73 billion in 2023, despite higher deposit costs.
That means they can still expand their net interest margin.
And don’t forget about JPMorgan’s investment banking business. This is where they help companies raise money, buy other companies, or go public. This business has been slow in 2023 because of the SVB crisis and other factors.
But I think it will pick up again soon as the economy recovers and companies look for opportunities to grow or consolidate. That will be another boost for JPMorgan’s profitability.
Risks and Opportunities
I’m not going to lie to you: bank investments are not risk-free.
Banks use leverage to boost their returns, but that also means they can lose more money if things go wrong. And some banks are still struggling to recover from the financial crisis of 2008-2009.
Just look at Deutsche Bank (DB). Their stock price is still way below their pre-crisis level.
But JPMorgan is different.
JPMorgan has a strong CET1 ratio of 13.2%. That’s a measure of how much capital they have to absorb losses in a worst-case scenario. And JPMorgan’s ratio is well above the regulatory minimum of 4.5%.
That means JPMorgan can withstand a lot of stress and still survive.
And not only survive, but thrive.
JPMorgan made a lot of money in 2022, despite the SVB crisis and the slowdown in investment banking. They earned $46.2 billion before taxes, which is the second-highest profit in more than ten years.
That’s amazing.
And I think they can do even better in 2023 and beyond.
Why?
Because interest rates are rising and that’s good for banks like JPMorgan. They can make more money from their loans and securities and grow their earnings per share (EPS).
I expect JPMorgan’s EPS to increase every year until 2025 and reach my target price of $219.25 per share.
Of course, I’m not stubborn or blind.
If things change, I’ll change my mind too. But for now, I’m confident that JPMorgan is a great investment opportunity that you don’t want to miss.
So buy the panic, and then sit back and relax.
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