InvestorGuide Stock of the Day Stock Analysis Let's evaluate the two competing arguments. The pro-JPM case rests on CEO Jamie Dimon and how he has been very effective in managing risk at the bank. JPM made the same mistakes as the rest of Wall Street when it came to the quality of mortgage assets on their book but the magnitude of exposure to residential real estate was much lower and better hedged. This meant the firm was able to take advantage of cheap acquisition opportunities in the form of Bear Stearns and Washington Mutual. Dimon has also gotten much better at lobbying Washington where government officials mostly like him and see him as a very competent leader. Additionally, there is much reduced competition on the street and that along with the upward sloping yield curve makes this a profitable trading environment for the firms that survived 2008. JP Morgan's two chief commercial banking competitors -- Bank of America (BAC: Charts, News, Offers) and Citigroup (C: Charts, News, Offers) -- have lost a lot of leverage with customers and regulators -- as they are both seen as wards of the state. This backdrop led JP Morgan to record a 36% jump in net income (to $2.7 billion) on a 39% year-over-year increase in revenue which rose to a record level of $27.7 billion. With short-term interest rates being close to zero, JPM was able to make $4.9 billion in revenue by exploiting wide credit spreads. JPM also took in a lot of equity underwriting business as the ranks of investment banks, with deep balance sheets to offer to clients, have dwindled. The investment banking division accounted for $1.5 billion of the $2.7 billion profit number. The case against JP Morgan uses these very same numbers. Yes, the second quarter was very profitable but let's remember JP Morgan is a commercial bank after all. It's not a hedge fund so don't count on that kind of fixed income trading performance again (plus spreads will narrow too) and it has never brought home the bacon consistently by operating as a white-shoe bulge bracket investment bank, so don't plan again on a quarter in which JPM outshines everybody (including Goldman) on the investment banking deal-making league tables. Therefore, for JPM to consistently perform well in the future, it will have to continue to rely on its bread-butter business of consumer and business banking. And that's where there are serious problems now and in the future. For example, JPM made only $15 million from retail banking this quarter as compared to $474 million last quarter and losses at the consumer lending division rose to $955 million from $389 million. And despite all the talk of an improving economy, housing loans continue to deteriorate with a $1.31 billion charge-off in this segment, up 4.61%. So the argument here is simple, JP Morgan's core business of lending continues to hemorrhage blood and with the unemployment rate slated to cross 10%, things will only get worse. Additionally, JPM will have to suffer more pain thanks to its commercial real estate portfolio which has yet to take major hits. So which of these two arguments carry more merit? Time (and the future course of the economy) will tell but we lean towards the first position because a) JP Morgan has set aside about $29 billion in loss reserves (or 5% of loans outstanding) providing it with a much bigger cushion than its competitors to deal with future losses and b) it may be time to start thinking of JP Morgan as more than just a commercial bank. The departure of Lehman and Merrill has probably created a void that needs to be filled by a blue-chip investment bank. JP Morgan could play that role well especially with Bear Stearns in its fold. Also, Bear was a powerhouse in the area of bond trading, something that JPM is finding very profitable.
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