JPMorgan Chase in 2013: Humbled, But Not Beaten

Dow Jones Industrials Average (^DJI -0.91%) component JPMorgan Chase (JPM 0.11%), which had emerged from the financial crisis with a reputation for being armor-plated, entered 2013 still reeling from the reputational fallout of the London Whale debacle, in which a set of ill-judged and poorly monitored credit derivatives trades ultimately cost the bank $6 billion.

That scandal set the tone for a year in which investigations and legal actions have further tarnished JPMorgan's reputation. Nevertheless, as the table below suggests, the bank remains one of the Dow's best, most profitable franchises:

The numbers

As of Dec. 4. Source: S&P Capital IQ and Motley Fool CAPS.

JPMorgan CEO Jamie Dimon has been a vocal and combative critic of regulators in the Dodd-Frank era, but, as it became clear that the bank's own front doorstep could use a little tidying, he has adopted a lower, more conciliatory profile.

In May, he faced a shareholder vote that would have split the chairman and CEO role, but the motion obtained support from just less than a third of shareholders (down from 40% the previous year, shortly after the London Whale scandal came to light.). Dimon is an extremely capable banker, but this challenging period has probably been useful in reining what looked like some overconfidence.

The hits did not end there for Dimon and JPMorgan. Indeed, the $9.2 billion in litigation charges the bank took in the third quarter broke the uninterrupted streak of profitable quarters under his tenure as CEO, which began in 2005. (That's right -- JPMorgan navigated the worst of the credit crisis without so much as a losing quarter.) Dimon commented that this was "very painful for me personally."

In its third-quarter earnings report, the bank disclosed its aggregate litigation reserves for the first time -- a whopping $23 billion -- adding that "reasonable possible losses" could total $5.7 billion on top of that. The sum of the two is equivalent to the bank's aggregate profits for the last six quarters.

And if there was any doubt that those reserves correspond to a genuine exposure, JPMorgan agreed last month to a landmark $13 billion settlement with the U.S. Department of Justice and state authorities related to the mis-selling of mortgages during the credit and real estate boom. It was the the largest penalty ever assessed on a U.S. company.

Despite this settlement and another one for $4.5 billion, also reached last month with institutional investors, the headline risk and uncertainty associated with JPMorgan's ongoing legal and regulatory exposure continues to weight heavily on the stock's valuation (although the multiples at it which it trades have been rising with the stock price).

That's critical in explaining how a franchise of this quality trades at less than 10 times the next 12 months' earnings-per-share estimate and at only a 10% premium to its book value. (Similarly, shares of Goldman Sachs, the pre-eminent independent investment bank, is valued at a 9% premium to book value.)

However, I think Jamie Dimon has found religion when it comes to working with regulators and working through the bank's remaining legal liabilities. That's good news for shareholders: While JPMorgan shares have beaten the Dow and the S&P 500 this year, there is still room for more gains in 2014, if the market lifts or reduces the punitive legal discount it has been applying to the stock.