Why JPMorgan Chase has become a Wall Street laggard
FORTUNE — Jamie Dimon may need to do something to prove he still deserves a premium. In the wake of the financial crisis, investors paid up for JPMorgan Chase’s (JPM) shares because Dimon had done a remarkably good job of steering his bank clear of the worst of the housing bust. But in the past few months, JPMorgan and its CEO seem to have lost their luster.
While shares of all of the big banks have rallied this year, JPMorgan’s are up less than most. The stock of Dimon’s bank has risen 15% since Jan. 1. That compares to 23% for Citigroup (C), 28% for Goldman (GS) and 42% for Bank of America (BAC). Worse, JPMorgan’s shares now get a lower valuation than many rivals – even those that were once seen as much weaker. In fact, were JPMorgan broken up and left for dead, according to analysts at Morgan Stanley, presumably booting Dimon in the process, the bank’s shares could potentially rise to $48, up 24% from its current price of $38.72. Ouch.
Dimon will get another shot to win over investors on Tuesday, when JPMorgan holds its annual meeting with shareholders. But arguing JPMorgan should be more highly valued than its rivals is harder than it used to be.
Part of the reason has to do with Dimon, who was famously one of the few bank CEOs to foresee losses in subprime mortgages and made moves to avoid them. But in the past year or so, it has become clear that Dimon wasn’t as successful as was thought. JPMorgan’s portion of the recent $25 billion ‘robo-signing’ settlement with 49 state attorneys general was $5.3 billion. Not as much as Bank of America, which has to pay out to states and borrowers nearly $12 billion, but more than double Citigroup’s penalty, which was $2.2 billion. What’s more, JPMorgan has more mortgage losses coming. Just over 14% of JPMorgan’s mortgages have either been foreclosed upon, are no-longer paying or are 90 days past due. That’s higher than at other big banks, where distressed home loans average 12%, according to the Morgan Stanley analysts.
And unlike subprime mortgages, JPMorgan doesn’t seem as aggressive in trying to sidestep what many people see as the likeliest cause of the next financial crisis: Europe. According to Mike Mayo, banking analyst at CLSA and author of the recent book Exile on Wall Street, JPMorgan has $16 billion in net exposure to Greece, Ireland, Italy, Portugal and Spain – the countries seen as the most likely to default.
Growth has been an issue as well. And it’s not for not trying. In the past year, JPMorgan has added 216 new branches and 4,000 retail bankers and sales specialists. It has also expanded its corporate lending and investment bank. Nonetheless, JPMorgan’s revenue has been dropping, not rising — down 18% in the fourth quarter alone. And JPMorgan still maintains the largest derivatives books among the big banks. Tighter regulations and lower debt ratings for the banks will probably make that business less profitable. Mayo says JPMorgan’s derivatives revenue could drop by $1 billion.
But JPMorgan’s biggest problem might be Dimon’s own inflated image of his bank. Last year, Dimon called proposed international capital rules that would force his bank to hold more capital than some of his rivals as “anti-American.” In fact, Dimon hasn’t rushed to raise capital like other banks. And Dimon says he won’t raise excess capital above new rules, as other banks have. JPMorgan now maintains a lower tangible capital ratio than Citigroup or Bank of America. And that appears to be fine with Dimon. His bank proved it was better at managing and protecting its capital. Yes, but that was three years ago. These days, JPMorgan looks like just another large bank to most investors, and not even the most loved one.