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JPMorgan's Stock Is Cheap Even With Regulatory Pain in 2014: KBW

NEW YORK ( TheStreet) -- Shares of JPMorgan Chase (JPM - Get Report) trade at a relatively low premium to consensus earnings estimates, and the multiple remains cheap even when factoring significant hits to 2014 earnings from new capital requirements and the Volcker Rule, according to KBW analyst Christopher Mutascio.

JPMorgan's shares closed at $55.49 Tuesday and traded for 9.10 times the consensus 2014 earnings estimate of $6.10, among analysts polled by Thomson Reuters. In comparison, Bank of America (BAC - Get Report) traded for 10.7 times the consensus 2014 EPS estimate of $1.37, based on Tuesday's closing price of $14.64. Wells Fargo (WFC - Get Report) closed at $44.03 Tuesday, trading for 11 times the consensus 2014 EPS estimate of $4.02, while Citigroup (C - Get Report) closed at $51.48 and traded for 9.2 times the consensus 2014 EPS estimate of $5.57.

So among the "big four" U.S. banks, only Citi trades at a lower valuation than JPMorgan Chase. And Citigroup is a long way from achieving returns on equity as high as JPMorgan. Among the big four, only Wells Fargo has consistently outperformed JPMorgan Chase.

Taking consensus estimates out to 2015, JPMorgan is the second-cheapest among all U.S. bank stocks for which consensus estimates for that year are available.

So what are investors afraid of? After all, JPMorgan earned a record $21.3 billion in 2012, or $5.20 a share, despite booking at least $6.4 billion in losses from the "London Whale" hedge trading problems. The company reported second-quarter earnings of $6.5 billion, or $1.60 a share.

Investors are concerned with federal regulators' recent proposal for higher minimum supplementary Basel III Tier 1 leverage capital ratios for the nation's highest banks. Under Basel III, the largest banks need to calculate a "supplementary" Tier 1 leverage ratio, which incorporates off-balance-sheet items. Under the Basel agreement, the minimum supplementary Tier 1 leverage ratio is 3%, but for the largest U.S. banks the new proposal requires a minimum of 5%, with affected holding companies required to maintain supplementary Tier 1 leverage ratios of 6%, by January 2018.

In addition to JPMorgan's multiple regulatory investigations, investors are concerned that the Federal Reserve's pending finalization of the Volcker Rule's ban on proprietary trading could cause trading revenue to sink considerably during 2014.
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