If your only goal is filling a void in your portfolio with a financial stock, JPMorgan Chase (JPM 0.06%) arguably works just as well as Charles Schwab (SCHW 0.13%).
But there are important differences between the two companies. Indeed, the starkest differences between the two organizations are being magnified by the current economic environment. Investors considering one or the other would be wise to take a step back and compare the two outfits in the proper context.
Here's what you need to know.
Comparing JPMorgan Chase to Charles Schwab
JPMorgan Chase is the nation's biggest bank, as measured by its $3.3 trillion worth of assets. It also just happens to offer brokerage, wealth management, and investment banking services. By contrast, Schwab's roots are in the brokerage and asset management industry, but typical banking services like checking accounts, mortgages, and credit cards are also part of its repertoire. Schwab also holds more than $7 trillion worth of clients' (nonbanking) investments.
Both companies are highly sensitive to interest rate changes, as interest income is both companies' biggest source of revenue. Both organizations do better in bull markets than they do when the market environment is lethargic. However, Schwab's business is much simpler and isn't nearly as adversely affected by economic weakness.
The numbers: Trading revenue (or "principal transactions") and asset management are tied as JPMorgan's most significant sources of revenue outside of net interest income. Credit cards and other consumer banking offers are respectable-but-secondary businesses.
Like JPMorgan Chase, Charles Schwab's biggest revenue driver is interest income. Beyond that though, asset management is by far Schwab's biggest breadwinner. Trading revenue is reliably its third-biggest source of sales. Banking fees are a distant fourth, although more meaningful to Schwab than Chase. The graphic below visualizes the comparison of the two organizations.
Data source: JPMorgan Chase and Charles Schwab. Chart by author.
Not factoring in either company's nearly identical net interest income widens the disparities between the two companies.
Data source: JPMorgan Chase and Charles Schwab. Chart by author.
Great, but so what? This is where it pays to fully understand how each of these businesses works.
Not exactly like the other
First things first. All that interest income? For better or worse, both Schwab and JPMorgan are in the same boat. Higher interest rates translate into higher interest income. But, both companies are managing similar interest-based business in the same environment. The same goes for trading, or principal transactions...more or less.
Then the two companies' businesses start diverging. Take investment banking as an example.
Investment banking is highly sensitive to economic conditions. Companies seek out funding for growth when the economy is strong. When the economy is weak -- like it is now and could be for a while -- and capital-raising could be tough, most organizations don't even bother trying. To this end, Chase's investment banking fees accounted for 5% of last year's top line, but that's only half of 2021's elevated levels. Schwab has no investment banking business to speak of, and as such doesn't run the risk of investment banking revenue evaporating.
While both financial giants operate asset management businesses, Charles Schwab's is markedly bigger than JPMorgan Chase's. That's an important distinction, too, not because this business is subject to market conditions, but specifically because it isn't.
As an investor, you probably don't see or notice it. But all of those mutual funds and exchange-traded funds you own? A small percentage of their value is regularly passed along to your broker regardless of how well or poorly that fund may be performing at the time. The same goes for fee-based portfolio management. Obviously the broad market's ebbs and flows change these underlying values. Barring incredible volatility, however, this revenue is collected over and over again at roughly the same levels as seen in the past.
In other words, roughly one-fifth of Schwab's top line consistently comes in as recurring revenue quarter after quarter. That's not as big an influence at JPMorgan.
Finally, while not huge profit centers, banking and deposit fees are relatively stable; Schwab's got more of them. JPMorgan Chase's mortgage and credit card business are more vulnerable to economic weakness that impacts consumers. In fact, Chase's mortgage business got cut nearly in half last year. Schwab's offerings on these fronts are outsourced, which also outsources most risks and volatility linked to them.
And the winner is...
Night and day? No, the two companies are still more alike than different.
The little things add up, though, and in light of this information it's not too difficult to figure out which of the two potential picks is the better one right now. It's Charles Schwab, by virtue of managing a more consistent, predictable business against a wobbly economic backdrop. Don't sweat its recent weakness linked to the implosion of Silicon Valley Bank too much. These sellers aren't seeing the bigger picture -- Schwab's not running the same degree of risk.
This won't always be the case, though. When the economy is on a firm footing and stocks are in a sustained bull market, JPMorgan Chase is in businesses that thrive, like investment banking and trading. Given that we don't know how long the current economic malaise will linger (we just know it could last a while), we don't know how long a big piece of JPMorgan's top line will remain under relatively more pressure.
