STOCK VALUATION – Bank of America & JP Morgan Chase

The 1997 Asian financial crisis made several economic concepts clear: (1) a nation's financial sector is a critical aspect of its macroeconomic stability; and (2) financial systems are important for maintaining order in the international financial sector.
Some experts have stated that the 2014 outlook of the global economy is very positive. However, these same experts also clarified their statements, making it clear that risks are still present.
There is a prognosis that there will be volatility in 2014. The implementation of financial market reform policies has been good, but these markets have not yet reached the level where reforms need to be. Therefore, a major reform in the financial sector is now necessary in all parts of the world.
Haruhiko Kuroda, Bank of Japan Governor, said that the Japanese economy is doing well; this is due to the fiscal stimulus, monetary easing and structural reforms. He believes that a 2% interest rate is achievable in 2 years. He is optimistic, because the United States (US) economy will grow and Europe is recovering. That is a good sign that economies will grow and accelerate. But he also talked about the fact that there are some possible risks ahead. (Huroda, 2014)
Wolfgang Schäuble, Federal Minister of Finance of Germany, stated that the euro is becoming more stable every day. He also said that the Eurozone performed much better than expected. Finally, he said that the euro remains a reliable currency and that no one is willing to change that. (Schauble, 2014)
Laurence Fink, Chairman and Chief Executive Officer of BlackRock (US), said that he has positive predictions for the economy in US. He also said that the US banking sector is in good shape; it is not experiencing the deleveraging that the European banking sector is. He then stated that world instability will take place, but that this doesn’t mean that the US economy will end up badly. He just wanted to say that there will be a lot of issues and disruptions to the market. (Fink, 2014)
Currently, the media are concerned about the US stock market. Some people described it as another bubble that can burst someday. Warren Buffet has said that there are always issues that are overpriced and some others that are underpriced, but there is a third group where the issues are at fair value. Today is no different.
Many people today live in fear; they are afraid that the circumstances that led to the Great Recession may repeat themselves. The Global Economic meltdown affected the worlds’ financial industry. The result was a capital management crisis in most financial institutions, especially banks. People lost their money, their houses, and their jobs, all in an instant. Some banks, like Leman Brothers, failed during that period.
The Bank of America offers their support to approximately 3 million small business owners. It is accomplishing this task through a suite of innovative online products and services which are easy to use. The company has clients in over 40 countries.
The Bank of America’s stock is listed on the New York Stock Exchange as BAC; it is the second biggest US bank. It has had elusive profits since the trouble it had with the purchase of Countrywide Financial in 2008. The Bank of America (BofA) has returned, on average, equity of 2.3%, leading it to rank in the bottom 10% of the big banks; its 2.1% net interest margin makes it the fourth worst ranking big bank. But BofA has dramatically improved its capital ratios; that helped them to double their stock in 2012.
JPMorgan Chase was the biggest US bank in 2013, with $2.3 trillion in assets, down six spots from 2011. Its return on average equity fell in 2012, after the disclosure in May of the same year of a $6.2 billion trading loss, attributable to the so-called “London Whale.” Despite all its losses, JPMorgan Chase remains among one of the most profitable banks in the US. Its poor ranking is due to its 2.2% net interest margin and NPLs of 3.1%. Recently, they began providing debt forgiveness to struggling homeowners, something that should benefit both JPMorgan and the struggling homeowners.
JPMorgan’s disappointing start to this year (2014) was mostly caused by weak trading and mortgage revenues. For JPMorgan, 2014 is a transition year. Among the changes that they are preparing to conduct, one is adapting operations to new regulations. They are also transforming their mortgage business into a more profitable and smaller entity. JPMorgan plans to keep expenses below $59 billion in 2014. The recent shares pullback has created a favorable position for patient investors.
Joseph Smith, Monitor of the National Mortgage Settlement (NMS) was assigned by the US government to monitor a settlement over mortgage securities. He said that this large bank had earned $6.3 million so far in what we can call "credits" from cutting borrowers' principals and agreeing to defer some of the payments on a test pool of 100 loans. The bank receives some extra credit for certain types of help. That is also less for other types. In summary, the total value is not a fair dollar for dollar accounting value for the assistance they provide. At the end of 2013, JPMorgan agreed to pay $9 billion in cash and $4 billion in the form of loan modifications to consumers to resolve federal and state claims.

A positive prediction for the BofA and JPMorgan stocks exists, but the prediction is more positive for BofA. This positive outlook is based on positive global growth.
One of the measures governments used to save money was to cut the salaries of its employees.
If we take a look at the macroeconomics of the US and the global economies, we observe that they remain in a slow growth mode. We do not know what will happen with the market tomorrow or in the next few weeks, but there are enough reasons for many analysts to believe that the market, as a whole, will be higher. That is the prediction for five to ten years from now. More vigorous growth will continue to come from the emerging countries.

The BofA’s current PE trailing for 12 months is below the industry average. The BofA PEG ratio is 0.61 below the PEG average of 0.65. The price-to-sales ratio is 1.73. The Bank industry price-to-sales ratio is 1.73. The BofA price-to-book ratio is 0.72. As reported by gurufocus site, the JPMorgan Chase dividend payout ratio was 0.30. During the past 13 years, the highest dividend payout ratio for JPMorgan Chase was 34.00, the lowest was 0.05, and the median was 0.31. As of today (2014), the dividend yield for JPMorgan Chase & Co. is 2.61%. During the past 13 years, the highest dividend yield for JPMorgan Chase & Co. was 7.64%, the lowest was 0.42%, and the median was 2.90%. JPMorgan Chase’s dividends per share for the three months that ended in March 2014 were $0.38. During the past 12 months, JPMorgan Chase’s average dividends per share growth rate were 26.70% per year. During the past 3 years, it was 93.10% per year. During the past 5 years, it was 77.50% per year. During the past 10 years, the average was -5.80% per year. During the past 13 years, the highest 3 year average was 93.10% per year, the lowest was -48.70% per year, and the median was 3.35% per year.

The BofA and JPMorgan Chase stocks are the best investments on the market. The main issue these companies are facing is that their stock prices were very low during the great financial crisis in 2008 and 2009. However, this was also true of the entire banking sector; all of them took a huge hit in 2008 and 2009. The prices of the stocks depended on the company situation, so the stock prices fell a lot.

The BofA Corporation's balance record had suffered from rising bond yields in the second quarter of 2014. That suggests that this bank may be more exposed to the risk of the interest-rate than other rival banks. According to the media, the government is seeking $13 billion to settle the BofA’s sales of mortgage bonds investigations. Because of this, BofA’s stock fell by 6%. The overall picture of the situation on its balance sheet was not as good, their March-quarter loss reminded investors that the recovery process will not be an easy one.
JPMorgan Chase managed to increase its net worth, according to their book value. The unpredicted losses were bad for investors, who were hoping that the BofA would increase share buybacks and dividends.
Interest rates are about supply and demand. If there is a huge appetite for debt, interest rates will be higher. Since people’s focus is now on saving money, analysts say that there will be no special changes in the interest rates during 2014; hence, short-term interest rates will remain low. On the other hand, long-term rates are not as low as they used to be. Long-term rates are much more market driven. There is a way to calculate long-term debt. The result of the global demand for credit, compared to the global supply of saving, is the global average interest rate for long-term debt. The global business cycle is important here, because the demand for credit goes up fast, while the savings rate usually falls; these reactions typically occur at the same time.
This year, the US deficit has fallen due to higher taxes and sequestration. However, Social Security and Medicare are at risk. The cash flow into Social Security has the potential to become negative within the next five years. The tax increase is expected, due to expanded growth. The slow growth mode, of approximately 2 to 3%, is expected for at least a few more years.
Another solution is to increase immigration, and consequently, increase the working population. It is complicated in a political way. Tougher solutions mean additional cuts in spending. Due to all of the facts, further tax increases are inevitable.
The BofA and JPMorgan Chase can benefit from tax collecting. In addition, a lower deficit will make some people take the credit, but the dangers are still very real. So again, there is little possibility that they can benefit as much as they could from the loans. There is also one negative fact: the medical sector. If Social Security and Medicare are at risk, people will not invest more money in it and it will remain at the same basic level of Social Security. That means less money for the banks and less money from the provisions.
We cannot say that all is bad. There is one positive detail about these two banks. The US economy is still one of the best places in the world for business. If we take a look at the Global Innovation Index, we see that it continues to place the US economy right at the top. That means that among the countries considered to be in the top ten, the US has all the necessary materials it needs to benefit and capitalize on innovations. As a result, there is an increase in new energy extraction technologies and domestic production. The fact is that energy exports in the US are now more than US energy imports. Some other positive signs are that the unemployment rate is falling, rather slowly, but falling. It did increase in July 2014, which caused stock market to loose previous gains. In addition, inflation is still under control.
Because of the slow economic growth, expected inflation is on a moderate level path for the next ten years. In the US, special software has been used to calculate the inflation rates for the years to come. In 2014, the predictions were from 1.4% - 1.6%.The present inflation rate is about 1.5%. However, this can be seen as a mask for higher inflation in a few important categories; these include electricity (3.2%), health care (2.5%) and housing (2.5%). Predictions for 2015 are 1.5% - 2.0%, with a core inflation rate of 1.6% - 2.0%. In 2016, the predicted inflation is 1.7% - 2.0%, with a core inflation rate of 1.8% - 2.0%; this is expected to be 2.0% until 2022. A relatively stable inflation rate will be a benefit for these two stocks.
If we analyze all of this information, we can see some positive movements in the two stocks. Positive factors come from the technology and energy industries. Innovations in technology and new supplies of energy will keep the positive groove on the market and will affect the financial sector. That means more money for the banks.
At the macroeconomic level, one of the challenges for economies is that supporting entrepreneurial ventures and innovations as investors increase their aversion to risk. A major contributor to growth is innovations. In addition, insufficient financials for a business can be the cause of stagnation in the economy.
In summary, the market risk of investing in the banking sector is still high, but there is also an opportunity. Considering the facts that the BofA and JPMorgan are some of the largest banks, it would be wise to buy their stocks at cheap prices, because “they are too big to fall” and they will return one day to their pre-crisis level; this is especially true of the BofA. In addition, not all banks are equal from the day of their creation; Wall Street analysts are not treating each of them in the same way.
It is true that the BofA has plenty of bad debts on its record, but it has taken measures to change this. They took care of many of their problems between 2009 and 2014. As such, they are returning to a path of good financial standing.
The BofA stock price is a lot lower than what it should be. The BofA is a well-known company which has the trust of the people. This company is also making many advances in the products they offer. The BofA offers a unique possibility to clients to deposit money right at their ATM's; this has been a very popular activity that fits in well with many of its customers. It is also a great benefit for the bank and the stock price.
The BofA’s stock is still cheap; it is better than cheap, it is relatively cheap. Therefore, a potential stock purchaser needs to act quickly to make more money on the BofA stock.
One more positive thing for BofA stocks is that the BofA has done a great thing in the bank market. They had an excellent idea of cross-selling its credit cards that they are paying off. They sold cards to their existing customers. Consequently, over one million new credit cards were issued by the BofA during the first quarter of this 2014. They are aggressively pushing cross-selling through a payment stimulus that targets customers better than they have ever done before. The result is that the BofA has seen success in several different areas. In 2013, the company performed better and sold almost three times more plans than it did in 2012.
The BofA has experienced a lot of problems since the financial crisis started in 2008. As such, they are renewing their focus on their core segments that are important for their business. They are also increasing their product development and marketing efforts. They have shown that they are capable of dealing with every problem there is. If the BofA masters the cross-sale, then its future will make them the leading bank, and hence, the future of its shareholders could be very bright. That also means that the price of their stock will be going up.
JPMorgan Chase stock currently appears to be of good value. Its price indicates that there is a positive forecast for it to increase. JPMorgan Chase’s price has pulled back and picked up during 2014. It is something investors have seen before. That is why we can expect further upward momentum. In addition, JPMorgan reported declining second-quarter sales; however, they beat the lower consensus estimates. Their earnings beat the drives by a trading performance that was better than expected. It is also driven by resilient commercial banking, asset management and community banking. Despite the appealing price-earnings valuations and dividends, at this point in time, some buyers can’t provide an asymmetric risk-return potential in the banking sector now.
JPMorgan is currently facing one problem. Growth has made this company very complex. In 2013, JPMorgan was the third-largest company in the world. Complexity can hide some weak spots in a company. It can also hide problems with an operation, until the problems grow to be too big to ignore.
Financially speaking, things are better for JPMorgan, but there is a risk to investors who are trying to understand the value of JPMorgan stocks. An Atlantic article sums the subject up. Someone said that the financial executives describe large banks as "complete black boxes." Hedge fund managers superiorly distrust bank risk-weightings. Peter Singer, of Elliott Associates, wrote a letter about investment funds in which he said that there is no big financial institution today whose financials and financial statements provide a meaningful clue. That is his comment about the risks that threaten these institutions.

If we pay attention to BofA’s fixed-income trading operations, it is clear that they suffered from the declining demands of clients and from low-interest rates. This suffering is something that none of the biggest Wall Street companies escaped during the first quarter of this year. The bank’s revenue from fixed income trading fell 15% in the first quarter of this year. Overall, market revenues increased, due to very solid results in equities and credit trading.

With demographic changes among people, comes a change in the appetite for risk. Retired and retiring families are changing their goals. They are moving from seeking solid growth to preserving their wealth. If we take a look at history, we see this modification strategy for investments that have resulted in moving a fairly large portion of a portfolio from equities into fixed income assets. We can say that this action today would not be wise if we consider the low-interest rate environment that will possibly remain in future periods. It will remain until the economy’s growth rate recovers.

Overall, the macroeconomic environment is solid, but we can’t say that it is vigorous. The process of developing a winning investment strategy in trading bank stocks is no different than any other strategy, but there are a few issues. First, it is crucial to identify companies that are well positioned in the market. The BofA stock is a good stock and it promises a lot. Second, we should not forget that dividend-paying stocks are less risky ways to make income; in addition, they face fewer problems on the market. Third, all the risk from the global market should be considered. Fourth, a fixed income strategy is tricky. Most investors wait for interest rates to rise to make a significant move. In this situation, timing is critical. Finally, the golden rule of investment and diversification remains key in any environment. Our scenario with bank stocks is no different.

In conclusion, by summarizing all of the data, it is revealed that the wound from the Great Recession period is still very fresh. It is a bad time for risks, but it is also a good time for those who want to buy bank stocks at a lower price that is inspired by slow, but positive, growth in an economy. Time is the only factor that can tell us who is right and who is not. The only thing we can do is to wait to see in which way our predictions are developing. We have the facts. People that are willing to invest should know that there is always some risk, but with the BofA and JPMorgan Chase, that risk is much lower than it used to be a few years ago.