Mike Mayo at CLSA has set his sights on JPMorgan on the eve of the bank’s annual investor conference.
In a new note (via NYT DealBook) he takes aim at JPM’s expansionary policy in a “Japan-lite” environment, particularly in Europe. The US branch expansion plans look a bit last century, and how can they be so confident US housing is bottoming, anyway?
He also has questions ranging from regulatory risk of the new Consumer Financial Protection Bureau to a succession plan for Jamie Dimon.
And then, there’s the “conglomerate” question:
Conglomerate discount: Why shouldn’t investors just buy the parts? Over the past five years, we have watched JPMorgan progress from sub-par to good and in many cases at or near best-in-class. Yet, the individual parts are just as compelling. For example, in cards, American Express has a superior brand (more status), unique access to elite clients, customer service (aided by its travel agency), processing network (owns its own) and a higher ROE target than JPMorgan (25% versus 20%). In asset management, T Rowe Price and BlackRock have better operating margins (44% and 36% vs 26%). In investment banking, Goldman Sachs has superior non-US, commodities and certain other operations. In processing (Treasury & Securities Services), State Street has a higher pretax margin (29% vs 24%) and better fee-per-assets under custody trends. In retail, JPMorgan Chase appears to surpass Wells Fargo in crossselling (based on recent company-disclosed metrics, JPM has 7.4 products per household whereas Wells has 5.9) though core deposits (as percent of total deposits) and revenue-per-branch trends still favor Wells.
This flows on to a relatively onerous capital requirement, he writes, which in turn makes comparisons even tougher:
In addition to having to be compared against the best company in each of the individual parts (a tough task for any firm), the hurdle at the corporate level is even more challenging. JPMorgan will likely have the highest SIFI buffer (the extra capital cushion for systemically important financial institutions) possible at 250bps, which implies a Tier 1 common minimum ratio of 9.5% after all Basel 3 rules are implemented. This roughly corresponds to 14-15% Tier 1 capital ratio under the original Basel Capital Accord rules. Thus, comparisons versus other companies become that much tougher, especially against non-banks like asset managers.
Mayo says asset management is already one of JPMorgan’s weaker divisions, along with cards — and he suggests this mix is pulling down its best-in-breed status in other divisions.
Tuesday could be interesting.
Related links:
Bank of America reports, confuses, wins and loses – FT Alphaville
Mike Mayo’s Citi DTAaaaatack – FT Alphaville