Here's why JPMorgan is the world's safest bank

JPMorgan Chase is a bank I have literally studied my entire adult life, as I spent my salad days on the trading floor of 1 Chase Manhattan Plaza in New York. JPMorgan's blowout 1.32 EPS on $22.89 billion in revenues beat Wall Street consensus and triggered a 300-point rally in the Dow that did not last. The bank earned $24.44 billion in 2015. Its dividend yield is three per cent. The shares are undervalued at 56 and I will use the implied spike to sell high-delta put options in Chicago. After all, the shares are down almost 20 per cent since the summer peak. This is not irrational since both the Morgan Bank and Chase Manhattan (the Rockefeller bank, as one prince called it in my presence) has traditionally dominated the global loan syndication and bond issuance market for the Seven Sister supermajors.
Energy loans are the Achilles heel of JPMorgan, with an estimated $45 billion exposure so a rise in loan loss reserves is inevitable given that Brent has plummeted to $30 a barrel. JPMorgan will be hit if crude oil plunges to $20 as global storage capacity runs out, as happened in 1999 when oil bottomed at $10. Energy loan reserves were thus the target of the wicked witch of Wall Street on Friday.
JPMorgan's "fortress balance sheet" (Jamie Dimon's words) and stellar 16 per cent US corporate/consumer/auto loan growth make me go gaga on the latest incarnation of the House of Morgan in my lifetime. The Basel Tier One capital is 11.70 per cent, the fall in cost of credit metrics and a seven per cent fall in costs are all impressive in their own right, as is the nine per cent return on equity.
JPMorgan now trades at book value and 9.4 times forward earnings. This makes no sense for five compelling reasons. One, JPMorgan has the least volatile, most diversified earnings base of any US money centre bank. Two, tangible book value is $48, a natural bottom for me even in a worst-case scenario. Three, the investment bank is Dimon's crown jewel, with fourth-quarter revenues $2 billion, up 10 per cent, a beauty for a global bulge bracket firm. Four, JPMorgan has promised that payouts/buybacks will rise and the Fed stress tests are no longer an inhibiting factor. Five, the litigation risk cycle has peaked, though the bank still swallowed a 2¢ legal charge. In the past, I dealt in IPOs, new issues securities and derivatives with the institutional bank in London. So it is only poetic justice that I take an retrospective, even nostalgic take on Morgan, Morgan the Financial Gorgon over time - 1990 in my case. As the global economy turns ugly, I see JPMorgan as a safe haven against the next Lehman fiasco in international banking. No sane US president will break up JPMorgan at a time when China is in financial chaos and oil/commodities spread deflation risk across the world's black gold/red metal provinces.
JPMorgan has the economies of scale, the global network, the balance sheet, the technology superstructure to serve the crème de la crème of corporate America. Think derivatives. Think Eurobonds. Think cross-border mergers, merchant payments and project finance. Consumer banking alone can add another $1 billion to the bottom line in 2016, thanks to a robust US housing, consumer credit and auto loan market.
The last decade was tough for the bank. The 2008 financial meltdown, the shotgun marriage with Bear Stearns, WaMu, the London Whale scandal, the "too big to fail" capital surcharges and People's Commissar Barney Frank's diatribes against Dimon and his merry men.
JP Morgan has the lowest cost deposit base in global banking and the most credible efficiency ratio management programme. Sometime in the next three years, JPMorgan will earn $28 billion. Its liquid assets are $500 billion, one-fifth of its $2.5 trillion balance sheet, making it an ultra safe, bank in a fragile, dangerous world. The Fed will engineer a steeper US Treasury yield curve and boost banking net interest margins. JPMorgan is in my view, the world's safest, best-managed bank, a worthy legacy to the memory of John Pierpont Morgan, king of Wall Street in the Age of Ragtime.