Wall Street Meltdown: Five Years Later:
A Good CrisisJPMorgan certainly made the best of the financial crisis, first in March 2008 acquiring Bear Stearns for roughly $10 a share, or roughly $1.2 billion. That was up from its earlier offer of $2 a share, after shareholders of the investment bank cried foul. Bear Stearns had suffered a liquidity crisis, which was the end result of a series of events that began in July 2007, when the bank said two of its subprime mortgage hedge funds had lost nearly all of their value. Following the collapse of Lehman Brothers and agreement by Bank of America ( BAC) to acquire Merrill Lynch, Washington Mutual was shuttered by regulators on Sept. 25, 2008. In a deal personally facilitated by Sheila Bair, who then chaired the Federal Deposit Insurance Corp., JPMorgan Chase acquired the banking operations of Washington Mutual for $1.9 billion. Washington Mutual was the largest U.S. bank ever to fail, with total assets of $307 billion and $188 billion in deposits. This was a beautiful deal for JPMorgan as well as the FDIC. For starters, "Claims by equity, subordinated and senior debt holders were not acquired," to use the FDIC's words, meaning the failed bank's holding company was left with those claims. Meanwhile, JPMorgan acquired over 2,200 branches and expanded its branch presence to 23 states from 17 states, becoming the nation's largest bank by deposits, with the second-largest branch network, after Bank of America. For the FDIC, the deal worked out very well because there were no losses to any of Washington Mutual's depositors, at a time when the basic FDIC deposit insurance limit was $100,000. Some depositors had lost money from bank failures leading up to Washington Mutual's closure. Another very significant advantage to the FDIC is that it provided no loss-sharing coverage on the assets acquired by JPMorgan. Following Washington Mutual's failure, it became standard for the FDIC to cover 80% of losses on assets acquired as part of failed-bank purchases. The FDIC also raised the basic deposit insurance coverage to $250,000 and put in place its Temporary Liquidity Guarantee Program, which temporarily removed deposit insurance coverage limits on most business checking accounts, while guaranteeing banks' newly issued senior secured debt. At the time of the acquisition, JPMorgan estimated it would mark down Washington Mutual's loan portfolio by $31 billion. The company in the third quarter of 2008 raised $11.5 billion in common equity and reported a $1.2 billion charge to increase loan loss reserves as a result of the Washington Mutual acquisition, but also booked a $581 million gain on the acquisition of the failed bank's operations. For the fourth quarter of 2008, JPMorgan Chase reported a slew of significant items, including a $4.1 billion provision for loan loss reserves, $2.9 billion in markdowns in its investment bank, and $1.1 billion after-tax benefit from "merger related items." In October 2008, JPMorgan was among the first nine large banks to receive government bailout funds through the Troubled Assets Relief Program, or TARP. The company received $25 billion in bailout money.
Solid Performance In the Wake of the CrisisLooking back, only Wells Fargo ( WFC) among the "big four" U.S. banks has outperformed JPMorgan Chase in the wake of the crisis:
- From 2008 through 2012, Wells Fargo's return on average assets (ROA) ranged from 0.44% to 1.41%, according to Thomson Reuters Bank Insight. Its return on average tangible common equity (ROTCE) over the same period ranged from 7.15% to 16.32%. Leaving out the "bad year" of 2008, Wells Fargo's lowest ROA over the period was 0.97% in 2009 and its lowest ROTCE was 14.89% in 2010.
- JPMorgan Chase's ROA over the past five full years ranged from 0.31% to 0.94%, while its ROTCE ranged from 6.55% to 14.92%. Leaving out 2008, the company's minimum ROA was 0.58% in 2009 and its minimum ROTCE was 10.66%, also in 2009.
- Citigroup's (C) ROA over the past five full years ranged from a negative 1.28% to 0.57%, while its ROTCE ranged from a negative 37.4% to a positive 8.61%. When leaving aside the "worst year" of 2008, the company's lowest ROA was a negative 0.08% in 2009 and its lowest ROTCE was a negative 1.5%, also during 2009.
- Bank of America's ROA has ranged from -0.09% to 0.26% over the past five years, while its ROTCE has ranged from -1.62% to 5.59%. The negative figures are both from 2010, when the company booked a $12.4 billion goodwill impairment charge, set aside $6.8 billion to cover mortgage repurchases losses and also recorded $2.6 billion in litigation expenses.
Stock Valuation and OpportunityDespite having pretty much sailed through the credit crisis, JPMorgan Chase is the cheapest of the "big four," on a forward price-to-earnings bases. The bank's shares closed at $50.53 Friday and traded for 8.3 times the consensus 2014 earnings estimate of $6.11, among analysts polled by Thomson Reuters. Citigroup's shares closed at $48.33 Friday and traded for 8.9 times the consensus 2014 EPS estimate of $5.6. Wells Fargo closed at $41.08 and traded for 10.2 times the consensus 2014 EPS estimate of $4.02. The most expensive of the group is Bank of America, with shares closing at $14.12 Friday and trading for 10.4 times the consensus 2014 EPS estimate of $1.36. The continuing flow of sometimes brutal headlines aside, JPMorgan's historically cheap valuation, even after three years of record earnings, speaks for itself. The investigations and lawsuits can't go on forever, and the company has several strong businesses that will keep bringing in massive revenue. Even Bank of America has been able to rehabilitate its reputation. It also pays to keep in mind that even the valuation for the currently high-flying Bank of America is historically cheap. The largest U.S. banks were easily trading for 20 times earnings before the real estate bubble burst. If JPMorgan's P/E ratio was to rise to the level of Bank of America's, investors would be looking at a gain of 26%. And over the very long term, with solid operating earnings and capital, leading to rising dividends and share buybacks, investors may look back in five years and realize they had seen a golden opportunity. JPM data by YCharts
Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn