For the past few months, I’ve been worried about what at JPMorgan Chase (WKN: 850628) could go wrong in the short term. After all, JPMorgan Chase is a major lender to the troubled oil industry. You also spend a lot of credit cards, which is a risk in a recession. I’m also concerned that JPMorgan will maintain its current dividend if the economy deteriorates.
But then the bank posted a profit of almost $ 4.7 billion in the second quarter. At the same time, it has covered billions to cover credit losses. So there is no doubt in my mind that JPMorgan is a strong bank stock to hold at the moment. In addition, it is likely to be quite cheap at a current price below $ 100 per share. The Bank of America (WKN: 858388) is certainly not a bad stock and did pretty well for a bank during the corona crisis. But what JPMorgan did in the second quarter was something very special in my opinion. But why?
A strong second quarter
On paper, JPMorgan and Bank of America performed fairly similarly in the second quarter. JPMorgan posted net income of nearly $ 4.7 billion in the second quarter, a decrease of 51% compared to the second quarter of 2019. Bank of America posted net income of approximately $ 3.5 billion, a decrease of 52% over the second quarter of 2019. Both share prices fell by similar levels due to the corona.
However, JPMorgan made $ 4.7 billion in profits, while also making approximately $ 10.5 billion to cover potential credit losses. This is probably the largest quarterly reserve JPMorgan has ever made. It is also more than twice the Bank of America’s provision. That was only $ 5.1 billion.
Jamie Dimon, CEO of JPMorgan, has always talked about building a “rock solid record”. That was implemented this quarter. While the Consumer and Community Banking, Commercial, and Corporate Banking segments posted losses this quarter, the Asset Management and Corporate and Investment Bank segments posted gains. And that made the company profitable overall. The investment bank in particular performed phenomenally this quarter, posting income of $ 16.4 billion. It was $ 7.3 billion in income from trading fixed income with a total profit of nearly $ 5.5 billion. This is exactly what a “rock solid balance sheet” looks like: if the markets are volatile, the investment bank intervenes in the lull, and if they are stable, the consumer bank takes over.
Also, keep in mind that JPMorgan has accumulated approximately $ 19 billion in cash over the past two quarters just to cover credit losses. Here you have gone a lot in advance. If everything does not turn out as bad as expected, you could reach for the pot again after a while.
I was skeptical that JPMorgan would be able to maintain its current dividend forever. The problem is that JPMorgan continues to be heavily regulated as the country’s largest bank.
Following the results of the Federal Reserve’s stress tests, JPMorgan announced that it would need to maintain a higher level 1 equity ratio (CET1) of common equity. This is a key figure closely monitored by the supervisory authorities. It measures a bank’s core capital as a percentage of its risk-weighted assets. The regulatory minimum capital ratio is likely to increase from 10.5% CET1 to 11.3% in October. Bank of America’s minimum capital ratio is likely to remain at 9.5% CET1. If the CET1 ratio falls below the minimum required by a bank, that bank is limited to paying out capital distributions equal to 60% of the eligible retained earnings. That could make a dividend cut more likely.
JPMorgan’s CET1 ratio was 12.4% at the end of the second quarter. Therefore, it may only decrease by 1.1% until it has reached this minimum. Meanwhile, Bank of America’s current CET1 closed the second quarter at 11.6%. So it can still rise above 2% before you reach the limit.
That’s why I currently see Bank of America’s dividend as much safer. But I think JPMorgan is still in good shape. First, the bank may still be able to pay its dividend if CET1 falls. Secondly, there are no signs that the quota will become so low again. The CET1 ratio fell to 11.5% in the last quarter, but that was after the bank’s business customers took an unprecedented amount of $ 50 billion in credit lines. As a result, the bank’s risk-weighted assets increased significantly and the CET1 ratio fell.
What speaks for JPMorgan
I would like to say again that Bank of America is not a bad stock. But I was really impressed with JPMorgan’s ability to make a $ 4.7 billion profit while putting as much cash aside to cover possible credit losses. As in the financial crisis, the bank is still well positioned in these times. Even though the dividend may be more at risk than Bank of America’s, even if there were a cut, it would likely be temporary. I still believe JPMorgan is able to maintain the current dividend level.
The post JPMorgan Chase vs. Bank of America – which is the better stock? appeared first on The Motley Fool Germany.
The Motley Fool does not own any of the stocks listed. Bram Berkewitzt does not own any of the shares listed. This article appeared on July 25th, 2020 on Fool.com and was translated for our German readers.
Motley Fool Deutschland 2020