The coronavirus pandemic has affected some industries more than others, and banking unfortunately fell into the category that saw more downside. Most banks saw their share prices decline significantly in March and April, when the virus affected the economy most heavily. And while I, like most others, had concerns about what would happen to all aspects of the market and the economy, I never felt more concerned about JPMorgan Chase (JPM 0.67%) than any other stock. Here's why.
The ability to withstand
At the end of March, JPMorgan's stock price fell all the way to a low of around $79 per share, down roughly 44% from what it started the year at. Now, obviously that is a display of extreme volatility, but the coronavirus pandemic is hopefully a once-in-a-lifetime event that actually shut down huge parts of the economy.
Even with this incomparable event, at $79 per share, JPMorgan still traded well above its tangible book value . What that means is that even at that scary and dangerous time, investors still thought the bank was worth more than the total value of all of the tangible assets on its books. Most banks traded at a steep discount to their tangible book value in March and April.
The other thing about JPMorgan is that it has managed to stay extremely profitable in an economy that has really struggled for large chunks of the year. Through the first three quarters of the year, the bank turned a profit of nearly $17 billion . That's down significantly from the first three quarters of 2019, but it turned this profit while setting aside a whopping $19.4 billion this year alone to prepare for future potential loan losses .
So, not only is the bank profitable, but it's prepared to deal with a lot of loan losses as a result of the pandemic. Banks that are profitable during tough economic times are the ones that separate themselves from the pack and generate consistent risk-adjusted returns for investors. Since dropping to $79 per share in March, JPMorgan has marched right back up, rising above $121 per share as of this writing, meaning it is only down about 13.5% from where it began the year.
JPMorgan is able to survive the hard economic times because it has built a "fortress balance sheet." It had plenty of capital and liquidity earlier this year to prepare for loan losses and deal with the massive drawdowns on existing lines of credit that occurred early on in the pandemic. The bank also has the ability to generate solid earnings at multiple stages of the cycle. When the economy is healthy, it can rely on its strong consumer bank to originate lots of credit card, auto, and mortgage loans to consumers, as well as loans to small businesses looking to invest themselves. But when the economy is more volatile, the bank relies on its strong investment bank division to help companies raise debt or equity, or do mergers and acquisitions with other companies.
The Apple of banking
Boris Schlossberg, managing director of FX strategy at BK Asset Management, called JPMorgan the Apple of banking earlier this year, and I tend to agree with him. JPMorgan is really good at every part of banking, from consumer banking to asset and wealth management to investment banking. The bank emerged from the Great Recession with the strongest position of any of the megabanks, and has once again performed incredibly well in the 100-year storm that this pandemic has created. I always view JPMorgan as having more upside than downside long-term, which is why I don't view the stock as very risky.