Today, we look at how one of America’s biggest banks is handling the stricter capital requirements placed on it by the U.S. Federal Reserve. As was the case with all U.S. banks, the 2008 financial crisis hurt J.P. Morgan Chase. Today its earnings have recovered and it continues to simplify its operations, solidifying its position as one of the leading U.S. dividend stocks we recommend for income seeking investors.
Following the 2008 financial crisis, the U.S. Federal Reserve ordered banks and other big lenders to boost the capital (cash, bonds and other securities) they hold. That put them in a better position to absorb future loan losses.
The Fed recently announced that starting in 2019, it will bring in tougher new capital requirements for the eight largest U.S. banks, including J.P. Morgan Chase. However, Morgan has bolstered its balance sheet and unloaded many of its riskier businesses since the crisis. That should help it meet the new standards without having to issue new shares.
J.P. MORGAN CHASE & CO. (New York symbol JPM; www.jpmorganchase.com) has four main divisions: Consumer and Community Banking, which includes branches and credit cards (45% of 2014 revenue, 44% of earnings); Corporate and Investment Bank, including brokerage and underwriting services (36%, 33%); Asset Management (12%, 10%); and Commercial Banking (7%, 13%). About 75% of Morgan’s revenue comes from the U.S.
The bank’s revenue fell 8.3%, from $102.7 billion in 2010 to $94.2 billion in 2014. That’s mainly because it sold some operations to cut its exposure to riskier businesses, such as owning and trading commodities. Low interest rates have also hurt the revenue it receives from new loans.
Even so, earnings jumped 22.5%, from $17.4 billion in 2010 to $21.3 billion in 2012. Per-share profits gained 31.3%, from $3.96 to $5.20, on fewer shares outstanding. Morgan continues to settle lawsuits related to its role in the 2008 financial crisis. As a result, its 2013 earnings fell to $4.35 a share (or a total of $17.9 billion). Earnings recovered to $5.29 a share (or $21.8 billion) in 2014.
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Dividend stocks: Morgan expects to save $2 billion by closing branches and focusing more on advice, less on transactions
Morgan continues to benefit as more borrowers repay their loans on time. It set aside just $3.1 billion to cover potential loan losses in 2014, down 81.1% from $16.6 billion in 2010.
The bank is now simplifying its operations to lower its costs. For example, it plans to close 300 of its 5,600 branches by the end of 2016, as more customers are banking online. Morgan also wants its branches to focus more on advising clients instead of processing transactions. These moves should help cut $2.0 billion from its yearly expenses by 2017.
Morgan’s 2015 earnings should improve to $5.85 a share, and the stock trades at just 11.8 times that forecast. The bank recently raised its quarterly dividend by 10.0%, to $0.44 a share from $0.40. The new annual rate of $1.76 yields 2.6%.
Recommendation in Wall Street Stock Forecaster: BUY.
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