JPMorgan Chase (JPM -1.06%) kicked off earnings season with a bang. The largest bank in the U.S. posted earnings per share that beat expectations by over 11% on strong net income growth in the quarter. The bank displayed why it's one of the best-run banks in the U.S. today.
Led by CEO Jamie Dimon, JPMorgan's resilience was on display in the third quarter. Dimon was one executive calling out the risks of higher inflation and interest rates in real time. JPMorgan positioned itself for this risk, which is why it has achieved solid growth in an environment that has proven tougher for others in the industry.
JPMorgan Chase's success under CEO Jamie Dimon
Since taking over as CEO of JPMorgan Chase in 2006, Jamie Dimon has a track record of steering the bank through challenging environments. In that time, the bank has navigated the Great Recession, a decade of ultra-low interest rates, the pandemic, and subsequent inflation. Dimon has kept JPMorgan Chase ready for what could be next.
In late 2021, Dimon warned investors about a "fat tail of inflation." In preparation, JPMorgan was extremely conservative about putting its cash to work. Dimon believed holding more cash on the balance sheet was the best way to prepare for potential inflation and rising interest rates.
Dimon had another warning last year: Interest rates could rise "significantly higher than the markets expect." At the time, central bankers projected the federal funds rate would be around 2.5% to 3% this year. Today, that rate is between 5.25% to 5.5%.
The bank hoarded cash in 2021 to prepare for higher interest rates
Bank deposits rose rapidly during the pandemic. In February 2020, total deposits at all commercial banks were $13.3 trillion. That figure rose to $18 trillion, representing a growth of 35% in just two years.
US Commercial Banks Deposits data by YCharts
Banks put these deposits to work into loans and other securities, like mortgage-backed securities. The problem was that some banks, like the now-defunct Silicon Valley Bank (an SVB Financial subsidiary), added a significant amount of these assets when interest rates were at their lowest level in decades.
When interest rates rose, these bank assets became less valuable, which wouldn't be a problem if deposits are stable. However, banks with significant deposit outflows would be forced to sell securities at a substantial loss.
JPMorgan Chase put cash into securities and other loans but held an even more significant amount in cash to give it liquidity if rates did rise. From 2019 to 2021, JPMorgan's securities and loan assets grew $354 billion. Meanwhile, its cash assets increased by $477 billion, giving it a big pile of cash ready to put to work.
JPMorgan's prudent balance sheet management has paid off in 2023
JPMorgan's conservatism with its balance sheet positioned it well this year when First Republic Bank was taken over by regulators earlier this year. First Republic's high-net-worth client base meant that many of its deposits exceeded the FDIC-insured threshold of $250,000, and the bank faced $100 billion in deposit withdrawals.
JPMorgan emerged victorious in the June government auction of the bank, acquiring First Republic's deposits and most of its assets for around $10 billion. The acquisition helped it add to its wealth management division, boosting its wealth division's assets under management by 10%.
Not only that, but JPMorgan has capitalized on the high interest rate environment. The bank's net interest income has grown by 40% to $65 billion this year. Its solid capital ratios improved, too, with its CET1 ratio of 14.3% up from 12.5% in the same quarter last year.
One of the top bank stocks you can own
JPMorgan Chase's fortress balance sheet has been on full display this year. The bank's prudence positioned it to acquire First Republic Bank, which it expects to add $500 million in profit annually. It's also capitalizing on higher interest rates, boosting its net interest income and strengthening its solid balance sheet.
JPMorgan is a well-run bank that has navigated stormy waters under Dimon's leadership. The bank is in a strong capital position and remains a solid stock for investors to buy and hold for the long haul.
