JPMorgan Chase (JPM 0.15%), America's largest bank by assets, is also arguably America's most successful mega bank. It has now battled through two big recessions over the last two decades: the Great Recession and the recent coronavirus pandemic, which is not over yet. Both have helped the bank emerge stronger. The Great Recession allowed JPMorgan to demonstrate its more prudent risk management and surpass all of its big bank peers in size and performance. The bank also proved very resilient in 2020, given the situation, and is now trading at all-time highs. Although the bank has already succeeded long term, here is one reason JPMorgan Chase can keep winning.
Revenue diversity
The one thing I really like about JPMorgan that will help the bank keep winning is its diverse revenue streams.
The bank has built five strong business segments: the consumer and community bank (CCB), corporate and investment bank (CIB), commercial bank, asset and wealth management, and the corporate unit. This has created revenue diversity that has not only enabled the bank to put up strong returns in different interest rate environments, but has also made JPMorgan resilient through recessions, which we saw recently in 2020.
Between 2015 and 2020, the Federal Reserve's federal funds benchmark rate has swung from practically zero to nearly 2.5% and back down to practically zero. The cost of deposits and the interest that banks receive on loans are both somewhat tied to this, so when the federal funds rate moves in one direction or the other, it can impact bank profitability depending on the makeup of the bank.
JPMorgan has shown that it can succeed in both rising and falling interest rate environments. Between the years 2016 and 2020, the bank never generated less than a 10% return on common equity for the full year.
Image source: JPMorgan Chase.
JPMorgan has also proved extremely resilient during the pandemic so far. Early on in 2020, the bank set aside billions to cover potential loan losses, but overpowered those credit expenses with record revenue to generate a 12% return on common equity in 2020.
The reason earnings have been consistently strong and the bank has proved resilient during the pandemic can in large part be attributed to these diverse revenue streams. The bank's two largest segments are the CCB (consumer & community banking) and CIB (corporate & investment banking). The CCB provides traditional banking and lending services such as home lending, business banking, and auto and credit card lending, while CIB provides services such as investment banking, wholesale payments, and markets trading.
In 2019, when rates were higher and the economy was normal, the CCB generated total revenue of more than $55 billion for a total profit of $16.5 billion. Meanwhile, the CIB generated more than $39 billion in total revenue for a total profit of nearly $12 billion. But when the pandemic hit in 2020 and sent rates plunging and the economy into a recession, the roles reversed.
CCB, which saw the interest it was making on loans decline due to lower rates, still generated more total revenue than CIB at $51.3 billion, but high credit costs reduced its profit to $8.2 billion. CIB on the other hand generated a massive $49.3 billion in total revenue for a total profit of $17.1 billion in 2020. That's because investment banking can perform better in periods of volatility. Other units at the bank like asset and wealth management contributed nicely in 2020 as well. The point is that one unit was able to pick up the other when it was down, and can continue to do so through different interest rate environments and different economic cycles.
Further diversification
Although JPMorgan has already done a great job of diversifying its business, the bank is going to keep bulking up these units. CEO Jamie Dimon has said recently that he is interested in buying asset management companies. The bank will also soon have a retail presence in nearly every state in the U.S., which will certainly help its CCB and also likely bolster other business lines as well. The ability to have different revenue streams that can perform well when others aren't makes me believe that this bank can keep winning long term.
