Yahoo Finance Is JP Morgan Stock Undervalued?
JP Morgan Chase: A Global Banking Powerhouse (Part 21 of 22)
Lower price-to-book ratio
JP Morgan (JPM) stock has historically shown greater resilience than its peers’ stock. It’s now trading well above pre-crisis levels. Still, it seems to have a slightly lower valuation when compared to its pre-crisis price-to-book ratio, which averaged ~1.3 beginning in 2005. Today, it stands at ~1.08.
Price-to-book ratio is the most widely used ratio for valuing banks. For more on this topic, read Must-know: Understanding the price-to-book value ratio.
The graph above compares price-to-book ratios at the big four banks over the last ten years.
Ratio is lower
JP Morgan’s price-to-book ratio is lower than that of the Financial Select Sector SPDR ETF (XLF). Its ratio is also lower than that of Wells Fargo (WFC), the best-performing bank of its peers in recent years. Bank of America (BAC) and Citigroup (C), the two banks most impacted by the crisis, are still trading at price-to-book ratios below 1.
One of the major factors contributing to JP Morgan’s lower valuation is the stock’s lower ROE (return on equity). Among the big four banks, JP Morgan’s ROE is only lower than that of Wells Fargo. Yet its ROE is lower than it is at other smaller and regional banks that are part of XLF.
The way forward
JP Morgan is committed to increasing its ROE over the next three years. It’s also making efforts to improve its operational efficiency. Exiting non-core businesses is one way it intends to make good on its commitments. The bank is also reducing its exposure to risky products and clients.
The bank has recorded high loan and deposit growth over the last five years. This is important for sustainable growth and reflects a level of trust in the bank. JP Morgan also leads in Markets and Investment Banking operations as well as client asset flows.
The bank is making efforts to improve its image, which suffered in the aftermath of the crisis and litigations that followed it.
It will be interesting to see if the noise about breaking up the firm turns into anything meaningful this time, or if it fades away again with time. If the bank is able to improve its efficiency and returns, this will surely be reflected in its stock price.
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