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TheStreet Open House

JPMorgan's Valuation Still Makes Sense

NEW YORK ( TheStreet) -- Apparently JPMorgan Chase (JPM - Get Report) has not won over the investors it lost from the embarrassing "London Whale" trade last year. Despite the great job the bank has done to mitigate the damage, investors remain hesitant to embrace its recovery.

However, JPMorgan is still a dominant power in the financial sector. Very few can match JPMorgan's performance in terms of profitability and credit quality. Although the bank is not out of the woods by any stretch, the current valuation looks good. But management has to show better growth to get investors to believe.

On balance, JPMorgan's first-quarter report was good, not great. As with rivals Bank of America (BAC) and Citigroup (C), there were plenty of ups and downs this quarter.

For instance, although JPM posted strong revenue of $25.8 billion that represented a 6% sequential increase, reported revenue was down 3% year over year.

Management said the year-over-year decline was due to soft mortgage banking and the continuation of production margin compression. Surprisingly, JPMorgan was outperformed by Citigroup, which posted 2% year over year growth in core revenue. Along similar lines, JPMorgan's net interest income wasn't any better.

As management alluded to, there were increased signs of margin erosion by a 6% year-over-year decline, and 2% sequentially. Likewise, net interest margin (NIM) fell almost by one-quarter point year over year. Initially, I was concerned by this. But there were NIM struggles across the entire sector.


For instance, Wells Fargo (WFC), which has had past struggles with NIM, didn't fare any better, posting a NIM decline of 33 basis points, which was also down eight basis points sequentially. What's more, Wells Fargo's net interest income also suffered a 3% decline year over year. Even though Citi showed some outperformance in revenue, Citi still posted a NIM decline of four basis points year over year.

So investors of JPMorgan can take solace in the fact that JPM's margin struggles looks to be an industry trend. Nevertheless, management deserves credit here for navigating this period of weak margins, which still lead to record profits of $6.5 billion, or $1.59 per share. But this is certainly a situation that bears watching going forward, especially if the revenue trajectory does not reverse course.

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