Subsector: Diversified Banking

Sector: Financials

INITIATING COVERAGE REPORT

William C. Dunkelberg Owl Fund

th
February, 6 , 2015
Lead Analyst: Pauline Da Costa
pdacosta@theowlfund.com
Associate Analyst: Kevin yang
kyang@theowlfund.com
Associate Analyst: Joey Mathew
jmathew@theowlfund.com

JPMorgan Chase & Co.

Exchange: NYSE Ticker: JPM Target Price: $68.86

COMPANY OVERVIEW
JPMorgan Chase & Co. is a leading global financial services
firm and one of the largest banking institutions in the United
States. The company operates in five segments: Consumer &
Community Banking (45.3% of revenues, 44% of N.I),
Corporate & Investment Bank (35.4%, 33.1%), Commercial
Banking (7%, 12.6%),
Asset Management
(12.3%, 10.3%), and
Private Equity (1.26%,
<1%). Geographically,
75% of JPMs revenues
are generated from
North America, 16%
from Europe/Middle
East/Africa, 6% from
Asia, and about 2%
from Latin
America/the
Caribbean.

INVESTMENT THESIS
JPMorgan Chase currently trades at a 7.91% discount to its
historical peer group average on a 3 year P/TBV basis. JPM
has recently faced headwinds from mortgage linked litigations
and losses. Investor concerns caused the company to trade
below its usual premium to its competitors, creating a value
opportunity for the Owl Fund. Since then, JPMorgan has
divested most of their legacy subprime mortgage originations,
and surpassed their claim standard approach to Basel III
Capital requirements. JPMs ability to leverage their global
position as a market maker in the increasing volatile currency
market, and above-requirement capital reserves will translate
to increasing shareholder value. The company has a history of
outperforming the market, which gives us the confidence that
multiples will appreciate. Our sector believes that the above
factors in addition to strong economic moats will return JPM
to its historical average multiple to its peers of 1.387x P/TBV
giving us a price target of $68.86 and a 21.79% return
including dividends.

Sector Outperform Recommendation: BUY

3-year price chart:

Key Statistics:
Price
Projected Return
Shares O/S (bn)
Market Cap (bn)

$56.38
24.98%
3.71
$232

52 Week Low
52 Week High
Yield
TBV

$52.97
$63.49
2.84%
$184,418

Earnings History:
Earnings Date

EPS

Revenue YoY

1Q14

$1.289

-8%

2Q14
3Q14

$1.562
$1.624

-2%
-1%

4Q14

$1.453

7%

Earnings Projections:
Year

Q1

Q2

Q3

Q4

Total

2015

$1.38

$1.46

$1.48

$1.49

$5.79

2016
2017

$1.58
$1.73

$1.63
$1.84

$1.65
$1.80

$1.65
$1.86

$6.45
$7.18

All prices current at end of previous trading sessions from

date of report. Data is sourced from local exchanges via
CapIQ, Bloomberg and other vendors. The William C.
Dunkelberg Owl fund does and seeks to do business with
companies covered in its research reports.

February 6, 2015

CATALYSTS

Greater Expected Shareholder Returns:

JPM should exceed estimation for the upcoming
Comprehensive Capital Analysis and Review (CCAR). Due
to Basel III standards for capital liquidity surrounding
Systematically Important Financial Institutions (SIFIs) after
the 2008 financial crisis, SIFIs like JPM must now have all
capital return plans approved by the Federal Reserve
through CCAR. To pass Basel III standards for the
upcoming March 15th CCAR, financial institutions must
have 9% of its equity in high liquidity assets. At the end of
2014, JPM had a 10.2% tier 1 equity ratio. Analyst
estimates have project JPM will submit a 10.1% rating for
review. With the fixed timeframe of CCAR, most
shareholder returns for SIFIs are projected out in analyst
models already. However, our sector believes CCAR will
result in a higher than estimated shareholder return plan
for JPM due to capital build-up throughout the year
specifically for this purpose as well as management
sentiment.
Currency Trading Tailwinds:
Going forward our sector expects headwinds in the fixed
income, commodity, and currency (FICC) trading segment
were counteracted by higher equity trading. Though the
Investment Banking sector has seen YOY losses in this
segment due to yield curve fluctuation, JPMs unique
position as a currency market maker has provided a strong
commission income to counteract the cyclical losses in
fixed income. As global deflation risk increases, JPM
should recognize increase commission income as volatility
increases. Our sector believes more counterparties will use
JPM for currency trading because they offer higher pricing
flexibility thanks to a leveraged position within the market
and higher currency quoting. JPMs average Value at Risk
(VAR), a measure of quoting flexibility, was $31 million for
2014, which is above the competitor average of $27 Million
(BAC: $35 Million, C: $20 Million, WFC: N/A), and this
allows them to quote the best price for a longer period of
time, increasing volume traded through them, and
therefore greater commission revenue.
Divestiture of Legacy Mortgage Portfolios:
Over the year 2014 JPM has reduced its legacy mortgage
portfolio by $700 million, which will reduce the onset risk
of litigation. Over the past year, JPM has reduced the last
of its real estate crisis vested securities, and its legacy
mortgage portfolio. At the same time, JPM has settled the
last of its litigation exposure related to the mortgage
market with its $990 million settlement with the SEC.
Going forward, our sector believes JPM is in a position
where they are not facing the same regulatory concerns as
its peers are, and are less likely to face litigation in the
future due to how clean its books have become.

The William C. Dunkelberg Owl Fund

Risks

Slowdown in Economic Recovery: Nearly

50% of JPMs revenues come from Consumer
& Business Banking, which is driven by a
recovering economy with increased lending
activity. A slowdown in this trend can hurt the
topline in this segment.

Regulatory Costs: Banks are expected to

fully comply with regulations imposed by the
Volcker Rule by July 2015. The
implementation could cost banks anywhere
from $413mm to $4.3bn. Other additions to
Dodd-Frank such as the Durbin Amendment
which lowers interchange fees, and the
Federal Reserve Regulation E limiting
overdraft charges, could also hurt revenues.

International Currency Recovery: The

volatility of global currencies due to increasing
and wide spread deflation risk is a factor that
could boost revenues for JPM. An
international currency recovery reversing this
trend will impact this top line driver.

Economic Moats

Economies of Scale: JPMs massive scale

allows it to spread its costs across a wide base,
resulting in a cost advantage over its
competitors. The companys size and
operational presence in North America,
Europe, and Asia allows it to take advantage
of currency arbitrage opportunities few banks
have the capabilities for.

Barriers to Entry: While banking is not startup cost intensive; brand identity, historical
legacy, customer loyalty, and high switching
costs are intangible barriers that make
duplicating JPMs operations not feasible for
new entrants. This in addition to the
aforementioned scale of the Company creates
a barrier to entry.

Network Effect: Having been ranked #1 and

#2 in ATM and retail branch networks,
respectively, JPM has the wide customer base
due to its scale and presence that allows the
company to enjoy a network effect.

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February 6, 2015

TARGET PRICE
Our target price is derived from multiplying an implied
multiple of 1.3871 to the current tangible book value of
JPM. At 1.3871 times, we feel this is a comfortable
target multiple compared to the companys current
P/TBV of 1.2836. After factoring the companys 2.84%
dividend yield, we arrived at a projected return of
24.98%.
Relative Target Multiple = 1.3871x
Current TBV = $49.6441
Price Target = $68.86

PEER GROUP IDENTIFICATION

Citigroup Inc. (NYSE: C)

o Diversified financial services hold company.
Consumer, corporation, government, and institution
provider of traditional banking and retail services.
Bank of America (NYSE: BAC)
o Through subsidiaries, BAC provides traditional and
money market savings accounts, checking accounts
and investment accounts to institutional investors,
corporations, and governments.
Wells Fargo & Co. (NYSE: WFC)
o Provides retail, commercial and corporate banking
services to individuals, businesses, and institutions.

INDUSTRY OVERVIEW
JPM has exposure to several industries: Commercial Banking, Consumer Lending, Securities Brokerage, Investment
Banking, Asset management and Credit Cards. Each segment holds different expectations for the coming years.
The main trends of the past year regarding the international exposure banks is the resolution of litigation, interest rate
uncertainty regarding Fed movement on interest rates, and more recently, global inflation risk tied to Japan, the
Eurozone, and Switzerland. Large banks have started settlement on issues stemming from the financial crisis as well as
new onset of litigation regarding the LIBOR price fixing scandal from the beginning of this year. Uncertainty from
potential new litigation has compressed valuations and earnings growth has been discounted accordingly.
Bulge bracket banks, as is the rest of the financial sector, are
still watching the Federal Reserve for further clarity into when
it plans to raise the funds rate. The feds official stance is that
they will not raise rates until they have seen clear economic
strengthening. However, with volatile macroeconomic
reporting over the last 18 months, the timeline for rate hikes
have become increasingly uncertain each day. In the interim,
Fixed Income, Commodity, and Currency (FICC) trading for
investment banks are extremely volatile. Looking Forward,
with the latest numbers on payroll multiple economic analysts
have predicted a summer 2015 start to rate hikes. However,
our sector believes with the timeline uncertainty, along with a
global slowdown of inflation, our sector believes we will see
interest rate hikes toward the end of the year rather than the
summer.
The economic trend most conducive to JPMs growth is the recent increase of volatility in the global currency market.
With GDP growth slowing in the Eurozone in particular, deflation risk is causing increased volume in currency trading.
The global currency turnover on average $4 Trillion dollars a day and currency instability should lead to increased
trading revenue for money center banks as investors restructure their portfolios and speculators crowd the market.

The William C. Dunkelberg Owl Fund

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February 6, 2015

Segment Overview
Consumer & Community Banking:
The Consumer & Community Banking segment serves as JPMs regional bank, providing personal services to consumers
and businesses at bank branch offices, ATMs, telephone banking, as well as digital platforms such as mobile and online
banking. This segment is further divided into three sub-segments: Consumer & Business Banking, Mortgage Banking,
and Card Services.
Consumer & Business banking, which is 19.36% of total revenues, provides investment and deposit products to
individual customers, as well as lending, deposit, and cash management solutions to small businesses. The Mortgage
Banking sub-segment makes up 6.35% of total revenues and includes loan origination and servicing, as well as portfolios
of home equity loans and residential mortgages. The Cards segment, which is 19.17% of total revenues, issues credit
cards to consumers and small businesses, offers payment processing services to merchants, as well as corporate and
public sector clients via commercial card products. This segment also provides auto and student loan services.
Corporate & Investment Bank:
The Corporate & Investment Bank segment is broken into 2 sub-segments; Banking, and Market & Investor Services.
The Banking segment advises on capital-raising in debt and equity markets, corporate strategy and structure, and
provides loan origination and syndication services. The Markets & Investor Services segment is a global market maker in
cash securities and derivative instruments, and also offers risk management, prime brokerage, and research solutions.
This subsector includes the Securities Services business, which provides custodian services, fund accounting and
administration, and securities lending products mainly sold to insurance companies, asset managers, and investment
funds both public and private. In total, the Corporate & Investment Bank accounts for approximately 34% of total
revenues.
Commercial Bank:
The Commercial Banking segment provides services to U.S and U.S multinational clients including municipalities,
corporations, financial institutions, and nonprofit organizations with annual revenues in the range of $20mm and $2bn.
The commercial bank also provides financing to real estate investors and owners. The segment offers a full suite of
comprehensive financial solutions such as investment banking, lending, treasury services, and asset management to meet
its client needs both domestically and internationally. The Commercial Bank makes up about 7% of the Companys total
revenues.
Asset Management:
The Asset Management segment manages about $2.3 trillion in client assets. This segment serves high net worth
individuals, institutions and retail investors in every global market, and offers investment management across all major
asset classes including alternatives, equities, fixed income, and money market funds. The segment also provides multiasset investment management to provide clients with customized investment needs. Products and services offered in
addition to investment management includes: retirement services, mortgage services, trusts and estates, loans and
deposits. Asset Management contributes about 11% to total revenues.
Corporate/Private Equity:
Accounting for about 1.26% of total revenues, this segment is centrally managed and is responsible for reporting,
measuring, monitoring, and managing the liquidity and funding of interest rate and foreign exchange risks. Corporate
Units involved in this segment includes Treasury, Chief Investment Office, IT, Legal, Compliance, Real Estate, Risk
Management, Finance, HR, Internal Audit, and Corporate Responsibility.

The William C. Dunkelberg Owl Fund

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February 6, 2015

POSITIVES

Growth in the Private Equity and Asset Management sub segments:

Though these segments combined contribute only 11% of net income, they have created synergies in other
segments. JPMs PE segment has grown revenue 40% QOQ and has created an organic pipeline for JPMs
investment banking segment through cross selling. JPMs Asset Management has grown Assets under Management
(AUM) at a 7% CAGR over a ten year period and has created 12% CAGR growth in bottom-line over the same
period. Q4 2014 marks the 23rd straight positive AUM growth quarter.

Experienced Management: With a now cancer-free Jamie Dimon still at the helm, JPM should be able to leverage
its surplus of management acumen to weather any market shocks or adverse changes to market conditions. Dimon
is now approaching 10 years with JPM, and was able to successfully guide JPM out of the recession and also bolster
the firm with the acquisition of Bear Stern in 2010, diversifying its portfolio.

Improving loan quality in credit card segment:

Our sector expects increased net interest revenue to be greater than that of the general industry coming from a
better credit quality. While most credit card issuers have guided negatively on net charge-offs for the coming year,
JPM is guiding positively, translated by a decrease in the net-charge off rate, signaling confidence in improving
credit quality.

Net charge-off rates

5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%

4.32%
3.97%

4.00%

3.50%

2.50%
2.48%
2.30%

2.33%

2012

2013

JPM

The William C. Dunkelberg Owl Fund

2014

DFS

COF

2015

AXP

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February 6, 2015
FINANCIAL ANALYSIS
JPMorgan operates in four main segments with its Consumer &
Community Banking (CCB), Corporate & Investment Banking (CIB),
Commercial Banking (CB), and Asset Management (AM) respectively
representing 45%, 36%, 12% and 7%. The CCB segment is divided into
the retail and the card services sub-segment each representing 26.6%
and 18.7%. The CIB segment is divided into the Fixed Income markets,
equity markets and other representing 14.1%, 8.7% and 12.6%. The CB
segment is divided into Middle market banking, mid-corporate banking,
commercial lending and real estate banking representing respectively
2.9%, 2%, 1.3%, and 0.5%.

REVENUE FY14
CCB

12%

CIB

CB

AM

7%
45%

36%

Segment Revenue Analysis

Consumer & Community Banking
Revenue in this segment is driven by lower provision for credit losses ($-1,871 FY 2013) and increasing card services
sales volume (up 12% YOY for Q4 2014). CCB saw revenues of $44 billion for the year 2014 decreasing by 3.6% YOY
due to a decrease of $100 million in business banking loan originations and an increase in net charge offs for the card
services in Q4 2014. The decrease in revenue was partially offset by deposit growth that is more than double the industry
average, record credit sales and client investment assets. In addition the launch of the reward mobile app generated
360,000 downloads. As of January 2014 JPM has increased convenience for their customers and their costs by creating a
Mobile app that decreases redemption cost to 1ct as opposed to $3 in a call center. Going forward the launch of Chase
Wallet Pay will give clients access to Chase and non-Chase credit and debit cards online. In addition card numbers will
be automatically updated when replaced. We expect a $500 million to $1 billion reduction of NCI Real Estate allowance
for loan losses as the credit quality of portfolio continues to improve. Card services revenue was $ 18.22 billion FY 2014
decreasing YOY by 3.60% due to restructuring costs. Analysts expect to see lower revenue from this sector over the
years but with better credit quality from the remaining portfolio. In line with the decrease in revenue, net charge-offs for
the Card services have decreased by an average of 24.6% since 2010.
Corporate & Investment Banking
Revenue in this segment is driven by increased raised capital for clients, and electronic trading. Over the year 2013 JPM
advised Verizon on $130 billion buyout of Vodafones 45% stake in the company, $6.5 billion offering for Sprint, $656
million of bonds to modernize housing of NYC low income residents. Revenue FY2014 was $34 billion slightly
declining from $34.2 from 2013 due to lower revenues in the fixed income markets. This loss was partially offset by
greater revenue coming from equity markets. FY2014 Fixed Income revenue was $13 billion decreasing in Q4 2014 due
to $5.6 billion in legal costs. Equity Market revenue was $ 5 billion up 1.3% from 2013 thanks to higher derivatives
trading and prime services revenue. IB fees were up 8% in Q4 2014 driven by debt underwriting fees.
Commercial Banking
Revenues for the CB segment are split middle market banking, corporate client banking, commercial lending, and real
estate banking. Revenues for these respective sub-segments were $2.8 billion, $2 billion, $1.2 billion, $486 million and
$362 million FY 2014. The key drivers for the segment are loans growth in the past 14 consecutive quarters (7% FY13),
increasing quality, 800 new clients in the middle market banking, $6 billion increase in multifamily loan balance, up 17%,
and 6% deposit growth for real estate banking. Commercial and Industrial loans represent 17.6% of the segment and
1.33% of total revenue. As credit quality gets better, C&I loans yield less. The company saw a 9% CAGR since 2011 in
Investment Banking gross revenue, and 16% CAGR since 2011 in International Banking.

The William C. Dunkelberg Owl Fund

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February 6, 2015
Asset Management
With 180 years of experience, JPM manages 60% of the largest pensions and sovereigns around the world. JPM has seen
23 consecutive quarters of net inflows in the segment. Revenue is driven by increasing assets under management
(AUMs). Revenue was $12 billion up 6.16% since 2013. Over the past 10 years JPM has seen revenue and AUMs grow
at respectively a 10% and 7% CAGR driven by strong investment performance seen through an average of 70.25%
performance in mutual funds through 2014, continuous reinvestment into the business, and global enhancement of
client experience. AUM net inflows were driven by a combination of long-term and liquidity products. AUMs were up
on average 11.75% through 2014. Net inflows for the four quarters of 2014 were respectively $14 billion, $23 billion, $24
billion, and $37 billion, driving higher management fees, higher performance, and higher investment sales revenue for
the overall segment.
Profitability Analysis
Margins
JPM has an operating margin for the year
ended 2014 of 31.62%, which is higher
Net interest margin
than the 22.34% average of its peer group.
4.00%
3.68%
In 2013 the company had operating
3.50%
3.33%
margin of 26.82% compared to an average
3.00%
2.87%
2.85%
3.00%
of 27.49% for its peer group. The
2.88%
2.54%
companys margin has increased thanks to
2.50%
2.61%
2.43%
2.43%
a faster increase in operating income
2.00%
2.23%
2.05%
compared to sales. JPM is more efficient
1.50%
in its operation and has proven to remain
1.00%
stable in industry slowdown. JPM is able
to realize revenue in areas its competitors
0.50%
are lacking. Net Interest Margin (NIM)
0.00%
for JPMorgan sits at the lowest position
2012
2013
2014
compared to its peer group with 2.05%
JPM
C
BAC
WFC
against an average of 2.77% FY 2014. As
auto loans tend to be shorter term, they
are lower yields than the broader range of products its competitors offers. In the near term we expect NIM to be
relatively stable, but going forward the company has project NIM to return to an average of 2.2%-2.7% over three to
five years, increasing their net interest income and profits by approximately $6 billion after-tax. This may take more time
than predicted if interest rates continue to be low.
ROA & ROE
JPM falls above its peer group with an ROA and ROE respectively of 0.87% and 9.75% compared to an average of 0.68%
and 6.25% for its peer group. This is mainly attributed to its diversified structure. Its credit card and loan receivables can
largely be covered by their customer deposits that have slightly increased between 2013 and 2014 to $498 billion.
Shareholder Returns
Thanks to its 10.2% tier 1 ratio in Q4 2014 we see JPM surpassing CCAR requirements and having the capital on hand
to increase dividends to $0.40 a share to $0.42 per share or repurchasing a minimum of $2 billion of shares in Q2 2015.
Over the past three quarters JPM has consecutively repurchased $1.5 billion of common equity in each quarter. On
March 15th we will know if JPM has authorization by the Federal Government to repurchase shares or increase dividend.
Dividend yield currently stand at 2.84%.

The William C. Dunkelberg Owl Fund

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February 6, 2015
Efficiency ratio
JPMs efficiency ratio was 64.37% FY 2014 below the average of its peer group at 72.8%. JPM experience a decline of
11.12% against an average appreciation of 9% for its competitors. The efficiency ratio is a measure used to compare
costs to revenues. As the overhead ratio for JPM has decreased recently due to regulatory and control issues they have
managed, it is faced with a lower ratio compared to its comps. The overhead ratio represents the non-interest expense as
a percent of total revenue. Total overhead expenses for JPM were $60 billion in 2013 and $59 billion in 2014. We expect
to see this decrease over the years, and going forward JPM is looking to reduce its efficiency ratio to the mid-50s by 2016.
Cost savings will come from a shifting process to self-servicing and digital services, in line with the industry change
towards mobile banking. We have seen customers use these online devices with 360,000 downloads of Chase My New
Home mobile app.
Debt
Total debt maturing between 2015 and 2040 is $265 billion including interest for a total of 1,721 total issues. For 2015
interest payments will be $3 billion. JPM s asset coverage ratio shows that the company can currently pay 4.14 times its
debt obligations with its assets after all liabilities have been paid.

Undervaluation
JPM is currently trading at a 7.91% discount relative to its peer group on a 3 year P/TBV historical average basis. This is
due to heavy litigation costs payments in Q4 2014 and recent headwinds from FICC trading. To derive our target price,
we multiplied the comp group average P/TBV by the mean factor to derive JPMs implied P/TBV, which we then
multiplied to the Companys TBV/Share to get our target price.
3 Year P/TBV Spread:

The William C. Dunkelberg Owl Fund

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February 6, 2015
Peer Group Evaluation:
Ticker

Company

P/E

P/TBV

Profit

ROE

ROA

NIM

JPM

JPMorgan

Market Value AUM growth Asset Coverage

$232

9.13%

4.14

9.77

1.28

Current TBV Operating

$184,418

31.62%

23.10%

9.75%

0.87%

2.05%

301.45% $ 31.00

D/E

VAR

64.37%

C
BAC
WFC
Average
Median

Citigroup
Bank of America
Wells Fargo

$146
$166
$274
$195
$166

0%
9.92%
4.17%
7.05%
7.05%

3.46
4.25
6.97
4.89
4.25

9.55
11.44
13.28
11.42
11.44

0.85
1.11
1.97
1.31
1.11

$188,453
$173,694
$159,557
$173,901
$173,694

18.68%
8.14%
40.21%
22.34%
18.68%

8.07%
5.74%
27.34%
13.72%
8.07%

3.37%
1.71%
13.68%
6.25%
3.37%

0.39%
0.23%
1.43%
0.68%
0.39%

2.88%
2.43%
3.00%
2.77%
2.88%

304.68%
225.81%
133.57%
221.35%
225.81%

72.65%
88.25%
57.52%
72.81%
72.65%

$
$
$
$
$

35.00
20.00
27.50
27.50

Efficiency

Target Price:

Book Value
$232,065

Comp
Multiple
1.3086

Current price
$56.38

Goodwill
47,647

JPM Mean
1.06

Target price
$68.86

TBV

Shares
Outstanding
$184,418

Implied
Multiple
1.3871

Return
22.14%

The William C. Dunkelberg Owl Fund

3,715

TBV/Share
49.64

TBV/Share

Target Price

49.64

$68.86

Dividend Yield
2.84%

Total Return
24.98%

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February 6, 2015
Appendix:
JPM vs. S&P 500 Index

JPM vs. S&P Financial Index

JPM vs. XLF

The William C. Dunkelberg Owl Fund

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February 6, 2015
DISCLAIMER
This report is prepared strictly for educational purposes and should not be used as an actual investment guide.
The forward looking statements contained within are simply the authors opinions. The writer does not own any
Corning Incorporated stock.
TUIA STATEMENT
Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his
tireless dedication to educating students in real-world principles of economics and business, the William C.
Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging,
practical learning experience. Managed by Fox School of Business graduate and undergraduate students with
oversight from its Board of Directors, the WCD Owl Funds goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investment professionals.
Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs
and partial scholarships for student participants.

The William C. Dunkelberg Owl Fund

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