Most people who follow bank stocks probably know JPMorgan Chase (JPM 0.06%) is a big bank. It is, after all, reputed to be the nation's largest. But even people who are familiar with JPMorgan Chase may be surprised at how much larger it is if you measure its size in a slightly different way.
When analysts talk about the size of a bank, they're generally referring to its balance sheet and, more specifically, to the combined value of its assets, which tend to consist of loans and government securities.
JPMorgan Chase has $2.5 trillion worth of assets. Roughly a third of those are loans, a third are securities, and the final third is split between cash and other types of assets.
Data source: Quarterly regulatory filings. Slideshow by author.
The size of a bank's balance sheet is unquestionably important. This follows from the fact that one of the main ways a bank makes money is to arbitrage interest rates -- that is, to borrow money at low short-term rates from depositors and wholesale lenders, and then invest the funds into assets that earn higher longer-term rates, such as loans and securities.
The more a bank can leverage its capital in this way, the more money it makes. Last year, for example, JPMorgan Chase generated $44 billion worth of so-called net interest income. That equated to just under half of its net revenue.
But even though measuring a bank's size based on the value of the assets on its balance sheet is the most common way to do so, there are other things investors should factor into the equation. There's one metric in particular that shows just how much a bank's balance sheet underestimates its economic footprint.
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I'm talking about assets under management or custody. The former are assets held for individuals in, say, an investment fund that's actively managed by JPMorgan Chase. Assets under custody, by contrast, refers to assets the bank administers for institutional investors.
The important thing to note, here, is that neither of these types of assets is reflected on JPMorgan's balance sheet. Additionally, while assets under custody or management don't generate the same bang for the buck that on-balance-sheet assets do, since the majority of income therefrom goes to the assets' legal owners, assets under management or custody do play into a bank's profits by way of noninterest income.
To this end, in JPMorgan Chase's latest quarter, nearly a quarter of its fee-based revenue, or $1.1 billion, from its corporate and investment bank came from activities associated with asset management, administration, and commissions.
On top of this, the quantity of assets under management or custody also factors into the amount of capital a bank must hold. In short, a bank that exercises authority over a sizable amount of off-balance-sheet assets like these face slightly higher capital requirements.
So, just how much bigger is JPMorgan Chase if we include these? It's roughly 10 times bigger than its balance sheet lets on. As of its latest quarter, it reported nearly $21 trillion worth of assets under custody and management. Add that to the $2.5 trillion on its balance sheet and you're looking at a bank that controls assets valued at just under $25 trillion.
