Should You Consider J.P. Morgan Despite Resurfacing Legal Issues?

J.P. Morgan has much more potential to increase its equity valuation by staying clear of lawsuits and reducing operating expenses.

Jun 18, 2014 at 10:42AM

J.P. Morgan (NYSE:JPM) is currently in the news again as the City of Miami sues the investment bank for its  predatory lending practices targeting minorities.

Though J.P. Morgan has had its fair share of legal troubles, the bank has now  worked through the majority of its legacy issues. With a top-tier return on tangible equity, further cost cutting potential and a focus on growing its business, J.P. Morgan is an interesting bank investment for long-term minded investors.

Legal troubles manageable
After J.P. Morgan settled with the Department of Justice for $13 billion over questionable mortgage practices at the end of last year, the investment bank managed to stay out of trouble for a while.

Bank of America (NYSE:BAC) and Citigroup (NYSE:C), on the other hand, are now making major news headlines and are also battling the Department of Justice to avoid further mortgage probes. While both companies remain eager to negotiate for lower settlement amounts, the DOJ certainly expects the companies to pay up.

Bank of America's and Citigroup's stand-off with the Department of Justice has led investors to ignore resurfacing legal troubles for J.P. Morgan. The city of Miami claims, that J.P. Morgan deliberately disadvantaged minorities from obtaining favorable loan conditions.

The AP reported, that J.P. Morgans discriminatory lending practices, according to the lawsuit, actually "worsened the foreclosure crisis in minority neighborhoods" and that loans "were disproportionately made in black and Hispanic neighborhoods with burdensome terms, leading to a far greater rate of foreclosures."

Tough accusations
At the moment, however, there is definitely not enough information out there to determine whether the lawsuit has any merit and J.P. Morgan is surely going to deny any accusations about predatory lending practices.

In any case, giving J.P. Morgan's track record in resolving legal issues, the current lawsuit is unlikely to have a serious bottom line impact for J.P. Morgan; thanks to the constructive settlement approach of Chief Executive Officer Jamie Dimon.

GSource: Wikimedia Commons, Jamie Dimon, Chief Executive Officer of J.P. Morgan

Strong potential to improve profitability
Though legal issues make for entertaining headlines, investors really should look at J.P. Morgan's underlying business performance.

Over the last four years, J.P. Morgan has largely suffered from a constantly increasing cost base. In 2010, J.P. Morgan's operating expenses were reported at $61.2 billion which have risen to $70.5 billion in 2013. J.P. Morgan's reported 2013 net income was roughly at the same level as it was in 2010, around $17-18 billion, even though its earnings have been quite volatile over the last four years.

With billions of dollars in potential cost savings from business simplifications and a likely end to multi billion dollar settlements, J.P. Morgan's equity valuation has much more room to grow and the bank should be able to focus on growth going forward.

Strong returns on tangible equity
Though J.P. Morgan has had some legal troubles in the past which clearly affected the bank's profitability, the investment bank still compares favorably against other banks in the financial sector.

Its return on tangible common equity, based on first quarter results, is actually the second highest in the peer group consisting of large-cap financial institutions.


Source: J.P. Morgan Investor Presentation Morgan Stanley Financials Conference

Final assessment
J.P. Morgan has a lot more potential to grow its equity valuation as it has already worked through a large pile of high-profile settlements while the current lawsuit is not likely to have a significant meaning for the bank's profitability. J.P. Morgan is among the most profitable banks with the second-highest return on tangible equity among financial institutions and, with a focus on further cost cuts, shares of J.P. Morgan have much more potential to rise.

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

Kingkarn Amjaroen owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information