American banking giant JPMorgan Chase (NYSE: JPM ) is showing remarkable improvements in performance across business lines. It has beaten analysts' estimates by reporting net income of $5.4 billion in its second quarter, a 13% jump over the prior year. Does it deserve a spot in your portfolio?
The company managed to reduce its credit-card loan-loss reserves by $1 billion, and its investment-banking segment posted strong earnings and client flows. Last year, JPMorgan Chase's earnings got a boost from the release of $7 billion in reserves back into income, enabling it to report record high earnings of $17.4 billion, the highest among U.S banks. But Foolish investors should keep in mind that while improving credit quality is a good thing, a bank can't sustain earnings indefinitely by releasing provisions.
As savvy investors, we need to look at earnings and beyond to decide whether a stock is worth investing in. Let's narrow things down by comparing the company and its closest peers against a few important parameters:
- The price-to-earnings ratio: This ratio helps us to look at a company's earnings relative to its price and determine how cheap or expensive the stock is.
- The price-to-book (P/B) ratio: Widely linked with value investing and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea about a stock's value and indicates value opportunities.
- The tier 1 capital ratio: This metric, dividing the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times.
- The dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.
Take a look at the following metrics to get a better understanding of how JPMorgan Chase fares in terms of valuation, when compared with other U.S. banking giants.
Tier 1 Capital Ratio
|Wells Fargo (NYSE: WFC )||9.6||1.04||11.7||1.9%|
|Bank of America (NYSE: BAC )||6.0*||0.37||11.0||0.5%|
|Citigroup (NYSE: C )||9.1||0.49||13.6||0.1%|
Source: Capital IQ, a division of Standard & Poor's.
JPMorgan Chase offers the best combination of value and quality. While Bank of America and Citigroup might seem cheaper, their operations are of somewhat lower quality than Wells and JPMorganChase. JPMorgan Chase, however, trades at fairly distressed prices. On top of all that, the bank offers a significantly higher dividend yield than its competitors do.
Plus, the bank's general health is improving. Over the past year, its credit quality continued to improve as net charge-offs, delinquencies, and non-performing loans declined considerably. And there was that reduction in its credit-card loan-loss reserves as estimated losses declined.
The Foolish bottom line
With strong earnings and a compelling valuation, JPMorgan Chase looks like an attractive option. If you're thinking of going for big banking stocks, this bank might deserve a spot in your portfolio.
Add JPMorgan Chase to your stock watchlist.