Most investors know JPMorgan Chase (JPM 0.65%) is a well-run bank -- recent setbacks aside. But gauging precisely how well-run it is can be difficult to quantify.
At a bare minimum, a great bank must do two things: gather up copious amounts of deposits, and write good loans. The difference in yields between these two activities is generally enough to get most lenders through even the toughest of times.
Identifying banks with a good deposit base is easy, as the data is widely available for free on the FDIC's website. But determining whether or not a particular bank makes good loans is slightly more difficult.
Speaking generally, there are three ways to do so. You can look at the percent of loans that are either delinquent or in default. You can look at the percent of loans that are charged off each quarter. Or you can look at the amount a bank provisions each quarter for expected future loan losses.
In the chart below, I've looked at the latter. And it's here where JPMorgan shines relative to its competitors.
As you can see, JPMorgan is the only bank to have a smaller loan loss provision today than it did in the first quarter of 2006 -- that is, before the financial crisis emerged into the public view. Perhaps most surprisingly, some of the worst performers in this regard are the regional banks like PNC Financial (PNC 0.43%), BB&T (TFC 0.14%), and U.S. Bancorp (USB -0.20%), all of which are considered to be top-shelf lenders.
The explanation for this paradox is straightforward. Regional lenders like PNC, BB&T, and U.S. Bancorp rely to a greater extent on residential mortgages to fuel their bottom lines. JPMorgan, by contrast, has an industry-leading investment bank fused to its hip.
In addition, at least in PNC's case, the Pittsburgh-based bank has undergone a transformative acquisition, purchasing its larger rival National City Corp. at the end of 2008. The deal exposed PNC to considerably more risk, without which, we can assume, it wouldn't score as poorly as it does today relative to the beginning of 2006.
Either way, JPMorgan's ability to reduce its loan loss provisions below its pre-crisis level helps explain why the nation's largest bank by assets is churning out record quarterly profits despite a growing chorus of discontent with its business practices.
