Why J.P. Morgan(JPM) Reigns Supreme in The Banking World

Key Points

• The failure of Silicon Valley bank was not due to widespread issues in the industry from our analysis, but rather a mismatch between its investments and deposits. Not all banks are made equal.
• SVB’s higher percentage of commercial deposits, which are more susceptible to rapid withdrawals, combined with their concentration in high-growth areas sensitive to interest rates, contributed to their downfall.
• JPMorgan Chase’s market leadership in multiple business lines provides a safety net, even during financial system struggles.
• With JPM share prices attractive at their current levels, investors should consider them as a blue-chip anchor within the Financial Services Sector. Further price declines into the $115-120 range would create a bargain opportunity for Dollar-Cost Averaging(The Process of Buying Some Shares Here and There)

What Happened in Silicon Valley? 

The recent failure of Silicon Valley Bank (SVB) has raised concerns about the stability of the banking system and the risks associated with investment decisions in the Financial Services Sector. Depositors of SVB, who were primarily tech titans and startups, had rapidly grown their deposits during the early stages of the COVID-19 pandemic. 

As a result, SVB needed to invest these deposits to generate returns, leading to the addition of riskier, long-duration assets that were more sensitive to interest rate risks.

As the tech industry began to struggle, the continued need for withdrawals from their accounts at SVB led to the sale of assets from the bank’s balance sheet, revealing a clear mismatch between assets (deposits) and liabilities (loans and these investments with losses). 

Given the rapid rise in interest rates to combat inflation, these longer duration asset prices fell sharply as securities holding higher rates came to the market with greater demand. As a result, the securities SVB was holding were at risk of being sold for a loss as SVB was in danger of fulfilling withdrawal requests when customers began to panic and take out funds.

This incident could happen to other banks but it is important to note that SVB was at far greater risk than others. They had a very concentrated deposit base of start-ups and tech companies. Also they were totally reliant on the one revenue stream of being a Commercial (Company) Bank, with around 85% of revenue derived from that business. Also they took risk in longer duration assets and held securities at large losses. An experienced risk management team at a bank would know how to handle this more accordingly.

The dangers to the rest of the banking system are likely limited to regional banks. Larger, diversified banks typically will have a much more diverse set of deposits, additional business lines and are generally given more scrutiny from regulators. 

This crisis could potentially lead to banks being more cautious about lending which in turn could slow down the economy. So far, the Federal Reserve has shown a willingness to bail out these banks, and that signals to the market that they won’t allow for mass exodus from the financial system.

Why We Choose JP Morgan as our Top Banking Position

To avoid the risks associated with distressed stocks, it is recommended to focus on quality, especially in the banking sector. JPMorgan Chase (JPM) remains a top pick, thanks to its leadership in several categories, including investment banking, commercial banking, credit cards, retail, and consistent asset management. 

It also maintains a conservative “fortress” balance sheet and is led by Jamie Dimon. 

Jamie Dimon along with an experienced risk management team which is critical in banking shows Why Investing in Leadership Matters When Picking Stocks.  Its capital requirements are well above standards, and the company has taken a conservative approach to its loan portfolio compared with others.

JPM derives far less revenue strictly from Commercial Banking in comparison to SVB as it accounts for about 9% of JPM’s revenue. Other units like investment banking and asset management help to diversify the revenue stream.

Management also takes capital ratios seriously and doesn’t look to be invested in longer dated securities in a chase for greater income. The conservative nature allows the company to hum along and continue its market dominance but in a safe fashion.

The failure of SVB was not due to industry-wide issues, but rather a mismatch between its deposits and investments. The higher share of Commercial vs. Retail (consumer) deposits meant that these deposits were at a higher risk of quick withdrawals. In addition, the deposits were concentrated in high-growth areas that are sensitive to higher interest rates.

We recommend JPM as the choice for a bank stock within portfolios. JPM is a market leader in multiple business lines, meaning it is safe even when certain areas of the financial system are struggling.

JPM, unlike SVB, has been establishing a strong record of growing their dividend. Companies paying dividends should always be held in high regard and are seen as one of the more attractive means by which to reward shareholders. This provides transparency into the financial strength of a company. 

Their 10Y Compound Annual Growth Rate(CAGR) stands at an impressive 16.09%. This means that on average they grow their dividend by this percentage each year.

In comparison to JPM’s main competitors also identified as diversified banks, their ROE(Return on Equity) stands above all which is a testament to their ability to be an industry leader in generating profits with shareholder’s equity. 

ROE is widely considered one of the most important financial metrics for investment analysts when it comes to bank stocks.

GenVest QuickTake

The price for JPM is attractive at current levels and should be considered as a Blue Chip Anchor for any portfolio within the Financial Services Sector.  Further price declines into the $115-120 range would create a bargain opportunity for Dollar-Cost Averaging(The Process of Buying Some Here and There). 

The lessons learned from the SVB failure highlight the importance of careful investment decisions and the need for prudent risk management. JPM has a strong history of growth and execution thus carving out a role in most portfolios and is a classic example of how sometimes why the Best Stock? An Investor Might Already Know It!