There's a valuable lesson to be learned from JPMorgan's risk management.
Big banks kicked off earnings season, with some giants reporting fourth-quarter earnings on Friday. JPMorgan Chase (JPM -0.82%) posted good results for the quarter and finished the year with a record profit of nearly $50 billion.
The bank's solid results are due to its discipline in managing risk and maintaining sound financial footing to navigate anything the economy throws at it. Here's why JPMorgan Chase remains one of the top banks investors can buy today.
JPMorgan Chase's fortress balance sheet
JPMorgan's recent earnings report crushed expectations, beating analysts' revenue and earnings-per-share estimates and marking the sixth consecutive quarter the bank beat earnings estimates. The bank also posted stellar performance metrics that blew its banking peers out of the water, illustrating why it's the largest bank in the U.S.
The secret sauce for JPMorgan's success is its ability to navigate whatever the economy and market throw at it. It can do this because of its pristine, fortress-like balance sheet that places it on a firm financial foundation and provides an economic moat no other banks can touch.
How JPMorgan's prudence positioned it for last year's banking crisis
JPMorgan sits on a firm foundation because of its prudence just a few years ago. During the COVID pandemic, JPMorgan, like most banks, saw a large influx of deposits due to fiscal spending, rising personal savings, and the Federal Reserve's asset purchases. Some banks, such as SVB Financial's Silicon Valley Bank, took these deposits and invested heavily in mortgage-backed securities or other loans despite their low yields.
JPMorgan Chase CEO Jamie Dimon was more patient with deploying JPMorgan's capital. In early 2021, inflation was beginning to rear its ugly head. Dimon warned investors about a fat tail of inflation and that inflation could "go higher than people think." The bank wanted flexibility and liquidity if inflation ticked up because it meant interest rates would follow.
While the bank added a good number of bonds and securities to its holdings, it held even more capital in the form of cash and liquid securities. By the end of 2021, the bank had $1.7 billion in these assets. This financial flexibility ultimately positioned the bank to put in a winning bid for failed regional bank First Republic's deposits and assets when the company went under last May.
Identifying and preparing for risks is a top priority for JPMorgan
If you ask Dimon, higher-for-longer interest rates are one of several risks the bank continues to prepare for. In the company's release to investors, Dimon noted that ongoing government spending for the green economy, restructuring global supply chains, rising military and geopolitical tensions, and climbing healthcare costs could "lead inflation to be stickier and rates to be higher than markets expect."
The bank's balance sheet remained strong in the fourth quarter, with over $1.4 billion in cash and marketable securities. This cash balance is vital because it allows the bank to put cash to work when peers may be pulling back from lending and other activities. In other words, it will enable the bank to "be greedy when others are fearful," as the classic Warren Buffett quote goes.
Bank investors will want to keep an eye on this metric
Bank stocks have rallied hard in recent months on hopes that the Federal Reserve will lower interest rates in 2024. However, they will continue to face headwinds in the near future that investors will want to keep tabs on.
For example, net charge-offs have been rising industrywide, especially among consumers. In the fourth quarter, JPMorgan's net charge-off rate on credit cards ticked to 2.8%, up from 2.5% in Q3 and well above the 1.6% charge-off rate one year ago. The bank recorded a provision for credit losses of $2.8 billion in the quarter, reflecting charge-offs of $2.2 billion and a net reserve build of $598 million.
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Despite possible headwinds, JPMorgan's balance sheet is pristine, and its common equity Tier 1 (CET1) capital is stellar. The CET1 compares a bank's capital against its assets and shows how well it could absorb a financial shock. JPMorgan's fourth-quarter CET1 ratio of 15% outpaced its large bank peers, Bank of America (11.8%), Citigroup (13.3%), and Wells Fargo (11.4%).
JPMorgan is a solid stock for the long haul
JPMorgan is well positioned no matter what interest rates do. If they continue to rise, the bank has plenty of liquidity to capitalize on interest rates or make deals from circ*mstances that stem from higher-for-longer rates. If interest rates fall, the bank could benefit from increased lending, as falling interest rates tend to spur loan activity.
Under Dimon's leadership, JPMorgan has navigated numerous market environments, developed a healthy fear of risk, and prepared its balance sheet for worst-case scenarios. This prudence gives it flexibility and a strong economic moat, which is why it remains a top bank stock to hold in your portfolio for the long term.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
