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Unrequited

13 January 2012 By Antony Currie

JPMorgan deserves a little more love from its shareholders. Granted, its fourth-quarter earnings weren’t great. But overall, JPMorgan is in a solid position. And yet its stock languishes at around three-quarters of book value. It’s time for investors to overcome their fear.

The reticence to do so is perhaps understandable. With Europe’s woes continuing and a lack of clarity on a variety of new industry rules and regulations, it has been hard to regard virtually any bank stock as a screaming buy. And JPMorgan’s 11 percent return on tangible equity in the three months to December, which relied on a lowly 21 percent tax rate, isn’t much to write home about.

But America’s largest bank by assets continues to cut loan losses and release more from reserves. It’s also lending more – and at a pace that’s slightly above the industry average. And it’s likely be in a position to increase its dividend and buy back more shares after the Federal Reserve-administered stress test this March.

Chief Executive Jamie Dimon is even keeping pay in check. The bank only set aside more lucre for its staff when units performed better or, as was the case with retail banking, hired more people. It even delivered almost $1 billion more to shareholders by cutting compensation for its Wall Streeters, a 9 percent drop compared to 2010, even though revenue was flat and profit rose slightly.

In addition, JPMorgan usually earns more than its cost of capital. Bulking up its common equity under Basel III to 9.5 percent of risk-weighted assets shouldn’t affect that either. All else being equal, the bank needs another $25 billion or so of qualifying equity capital to hit the target. Generating a 15 percent return on that requires $22.5 billion of profit a year, $3.5 billion more than it did in last year’s dismal markets. Falling mortgage losses should take care of much of that.

Shareholders, however, aren’t ready to trust projections, preferring to wait till they can verify progress. Perhaps the Fed’s stress test results will do the trick. That’ll be bittersweet for Dimon, though. If it makes investors bullish, buying back stock will be considerably more expensive.

 

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