At the end of last week, JPMorgan Chase (NYSE:JPM) hosted its quarterly conference call to discuss its results from the fourth quarter of 2014. While the call covered a vast array of topics, here are the five most important:
1. Why falling oil prices won't hurt JPMorgan
Even though oil prices have declined dramatically over the past six months, JPMorgan doesn't see this as a material threat to future earnings.
There are two reasons for this. First, according to CEO Jamie Dimon, while some of the bank's commercial customers might be hurt, its retail customers will benefit from increased disposable income and the improved ability to service their debts:
We think it's very good for the consumer on balance and also for the economy on balance despite the strengthening dollar, so we think that the consumer spend, consumer even credit extension is likely to be positive as a result.
Second, according to CFO Marianne Lake, JPMorgan doesn't have significant direct exposure to companies that would be driven under by the fall in prices:
Our exposures are about $46 billion, about 5% of our traditional credit portfolio. About 70% of it is investment grade, about two-thirds of it is in the [corporate and investment bank], so these are large, well-capitalized companies.
2. JPMorgan doesn't manage its net interest margin
Most banks earn a considerable portion of their revenue from arbitraging interest rates -- that is, they borrow money at low short-term rates and then lend it back out at higher long-term rates. When income from this activity (which is captured by the net interest margin) is relatively small, as it has been in recent years, banks take a hit on the bottom line.
But that doesn't mean a company such as JPMorgan should artificially boost this income stream, which would require it to increase the risk in its asset portfolio. This is the reason CFO Lake pointed out that "We don't manage NIM."
3. JPMorgan is an asset-sensitive bank
Along these same lines, there's an important misconception to which even some of the most seasoned bank analysts fall prey: that the most ideal interest rate environment for banks is one in which the spread between short and long-term rates is as wide as possible.
But this isn't true at every bank. At a so-called "asset-sensitive" bank like JPMorgan, higher short-term rates matter most, as the interest income from its loan portfolios is tied more to the short end of the yield curve. As Lake noted:
We are more geared toward a short-end rates move and we're still expecting that to happen in the second half of the year. And so what really matters for us is Fed funds rate notwithstanding the overall yield curve.
4. Why JPMorgan shouldn't be broken up
This has been hotly debated since a Goldman Sachs report earlier in January suggested JPMorgan would be worth more if it were split into multiple independent companies. Suffice it to say that Dimon disagrees:
Look, unscrambling it would be extraordinarily complex and it would be extraordinarily complex in debt, in systems, in technology, in people and where certain things go and the businesses would start competing with each other right away, which I think is perfectly reasonable if they were all separate stand-alone. So look, we're very conscious of the narrative, which has become out there about this, but it is far more complex than that. The right way to look at it is we have these great franchises, we have a lot of time to manage through this and that is our objective, not unscrambling the egg.
5. JPMorgan is treading carefully in the mortgage market
Earlier this month, the White House announced plan to lower the cost of mortgage insurance on Federal Housing Administration-issued home loans, which are typically made to lower income borrowers who can't afford to put 20% down on a house.
Dimon said JPMorgan isn't taking the bait:
We have reduced our share of FHA loans [for] two reasons. One is the ongoing liability in the production side where the insurance was worthless over time, and the second is just the cost of servicing FHA loans when they go into default and they have a much higher chance of going into default than not.