by Charles Sizemore | May 14, 2014 9:46 am
JPMorgan Chase (JPM) recently dropped a bomb of an announcement, saying it’s likely to axe as many as 10,000 jobs (on top of any previously announced layoffs) before the end of 2014.
Given the bank’s shrinking profile — JPMorgan Chase has falling from first to eighth in the rankings of the world’s largest banks — some JPM stock holders are wondering if they should make it a cool 10,001 layoffs by tossing out CEO Jamie Dimon.
Jamie Dimon earned $20 million in his role as CEO last year, making him the second-highest-paid bank CEO after Goldman Sachs’ (GS) Lloyd Blankfein. Yet he presided over a year in which earnings per share shrunk to a three-year low … not to mention that a $20 million payout at a time when thousands of rank-and-file employees are losing their jobs does tend to raise a few eyebrows.
With JPMorgan Chase, we essentially have three overlapping questions:
Unfortunately, much of the bank’s business plan is out of Dimon’s and JPMorgan’s hands. The regulatory regime put in place after the 2008-09 meltdown has massively narrowed the scope of all of the “too big to fail” banks. The “Volcker rule” of the Dodd-Frank overhaul essentially killed JPMorgan’s proprietary trading desk years ago. Under the Volcker rule, banks cannot trade with their own capital.
That’s not necessarily a bad thing. Remember the London Whale incident? Poor risk management allowed one of JPM’s biggest traders to amass multiple billions of dollars in losses back in 2012 shorting credit default swaps. Ostensibly, the London Whale was “hedging.” Of course he was (wink wink).
Trading on behalf of others isn’t as lucrative as it used to be, either. Trading revenues are expected to be down about 20% this quarter after falling 17% in the first quarter.
Last year, JPMorgan made a surprise decision to exit its physical commodities business — after spending years building the world’s biggest commodities desk. Increased regulatory scrutiny was the driving factor.
So where does this leave JPMorgan Chase and JPM stock?
The bank still has massive consumer and business banking operations, investment banking and asset management (see the accompanying table, which summarizes JPMorgan’s first-quarter earnings release).
Consumer and community banking — which includes mortgages and small business loans — and corporate and investment banking back up the overwhelming majority of JPM’s revenues and profits. An improving economy should mean higher loan production and higher investment banking revenues through stock and bond issuance.
JPM’s ability to grow will be curtailed by higher capital requirements and by continued aversion — by both regulators and shareholders — to leverage and risk taking in general.
Essentially, JPM has been reduced to a lumbering giant that, while still profitable, will be limited to slow growth for the foreseeable future.
Jamie Dimon is well-respected among banking CEOs. But in fairness, look at his competition.
Dimon is too classy to make comments like those of former Citi CEO Chuck Prince (think back to the now infamous line, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”) And in general, Dimon was a little less reckless than his peers in the years leading up to the 2008-09 meltdown. His relative prudence put JPM in a better position than its rivals once the capital markets returned to normal.
But he also presided over the London Whale incident, the enabling of Bernie Madoff’s Ponzi scheme and the Libor rigging scandal, among other embarrassing incidents.
Paying him $20 million in a year at a time when jobs are getting cut and bankers make convenient political punching bags is a mistake, but it’s one that is easy enough to fix.
Dimon should step down, and JPMorgan should replace him with someone untainted by the bank’s recent scandals.
Given JPM’s reduced risk profile–and given that the credit crisis has long since passed — the bank no longer needs a rock-star CEO with an outsized salary.
Despite my view that the bank is doomed to slow growth for the foreseeable future, I’m actually pretty bullish on JPM stock at current prices.
JPM trades at 1 times book value and 1.4 times tangible book value, which excludes goodwill. Before the crisis, JPM traded at more than 3 times its tangible book value.
Of course, back in 2006, JPM operated in a looser regulatory environment and had far fewer constraints on its business. JPM should trade at a discount to its historical given the less attractive prospects facing the industry today.
That said, at 1.4 times tangible book, you have a wide margin of safety. If JPM’s valuation were to rise to a very reasonable 2 times tangible book, stockholders would enjoy a nice 43% return, not including dividends. And JPM pays a respectable 3% dividend at current prices.
My recommendation? Buy JPM stock on dips.
Earnings growth will be nothing to get excited about this year, sure. But while Jamie Dimon is likelier than not to maintain control for now, regulations are whittling away at the number of blowups that could occur under his watch.
And at current prices, there is substantial upside and very little in the way of risk.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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