JPMorgan Chase can Big Banks Survive?

It looks as if JPMorgan Chase (NYSE: JPM) has finally turned around; and seen the light at the end of the tunnel it entered in 2007. The problem is that it is still early to tell if the light is the sun at the other end or the oncoming train.

There was a little good news in Chase’s second quarter numbers, its revenues were up slightly from $92.72 billion in March to $93.28 billion in June, 2016. The bad news is that its’ revenues are still down from December 2015 when they were $93.54 billion and June 2015 when they were $95.1 billion. It is not clear if JPMorgan’s revenue growth has revived.

My opinion is that it will take several quarters of steadily revenue growth just to get this company back to where it was in June 2013 when the revenues were $99.13 billion. The second quarter earnings release Chase filed with the Securities and Exchange Commission indicates that is possible.

Business is Booming at Chase

The numbers indicate that JPMorgan Chase’s banking business is growing significantly. Some highlights include:

• Chase’s mobile App now has 25 million active members; and its usage grew by 18%, during second quarter. Note these numbers do not reflect Chase’s mobile and digital wallet Chase Pay,

• Average core loans increased by 23%.

 

• Deposits grew by 10% or $54 billion.

 

• Merchant processing grew by 13%.

 

• Credit card sales volume increased by 8%.

 

• Market revenue increased by 23%.

 

• Chase issued $1.2 trillion in capital

 

• $123 billion in consumer credit.

 

• $12 billion in US small business credit.

• Chase raised $599 billion in capital for corporations and governments outside the US.

 

• Total credit and capital shales in 2016 have been $1.2 trillion.

 

Okay so business is booming at Chase, but is the bank making money? After all this is the same bank that reported a free cash flow of -$21.38 billion on March 31, 2016.

If you look at the net income the answer is yes, just not as much as money. Chase’s net income actually fell by $90 million between first and second quarter, 2016. JPMorgan reported a net income of $24.05 billion in March 2016, and $23.96 billion on June 30, 2016.

Chase is a Pretty Good Investment

Chase is still raking in a lot of cash and generating a lot of float. Yet its float is falling, Chase reported $365.31 billion in cash and short term investments on June 30, 2016. That was down from $378.41 billion in March 2016, making for a drop of $13.10 billion.

That means Chase is still a great company that generates a lot of cash and still has a lot of float. It’s also a really good investment rewarding investors with a dividend yield of 2.82% and a return on equity of 10.81% on July 19, 2016.

From a value-investment standpoint Chase is a really good financial stock; because it looks undervalued at the $64.04 a share, it was trading for on July 22, 2016. That’s a pretty good bargain; considering the fact that Chase reported $2.466 trillion in assets on June 30, 2016.

Chase’s Impressive FinTech Capabilities

Chase also really interesting future thanks to its financial technology or fintech capabilities. Its’ Chase Pay digital wallet is poised to give Apple Pay and PayPal Holdings (NASDAQ: PYPL) a serious run for their money. My take is that the QR code technology Chase Pay is based on will be more secure than Apple and Android Pay and easier to scale up into a large payment processing platform.

A big advantage to Chase Pay is that the transactions will take place in Chase’s ecosystem not the retailer’s. That provides security and takes liability for losses away from smaller merchants. Another is that wireless signals which are easy to hack are not used instead QR code relies on an optical scan of a code that can be quickly changed.

The use of QR would enable Chase to rapidly expand the network because the customer’s phone scans the code. The code simply appears on a cash register or computer screen. The security is higher because the app in the customer’s phone makes the transaction directly in Chase’s system.

Chase is on the Blockchain Train

More importantly QR code would be easier to integrate with blockchain and bitcoin than Apple Pay. That would enable Chase to start processing cryptocurrency payments fairly quickly.

Chase is also doing some interesting work with blockchain. On February 22, 2016, its head of corporate and investment banking; Daniel Pinto revealed the bank had been using blockchain based product to move US dollars between London and Tokyo, The Wall Street Journal revealed.

On the same day, CEO Jamie Dimon revealed that the company was boosting Cybersecurity spending by 20%. Dimon did not say why beyond general discussion of threats.

It sounds as if Chase is now a major player in Fintech one has to wonder what will come of it. If Chase can become a leader in blockchain and cybersecurity it would be in a good position to develop new products, particularly blockchain backed securities, loans and consumer banking products.

The Threat from Glass-Steagall

There is an interesting black; or rather grey, swan threat to Chase’s future in the form of Glass-Steagall. Glass-Steagall was the Depression era law that forcibly separated investment and consumer banks for 60 years. Its repeal was one the hallmarks of Bill Clinton’s 1990s financial reforms.

Now both major US political parties; Democrats and Republicans, have added calls for Glass-Steagall’s return to their campaign platforms. Since the platforms are little more than public relations stunts its’ hard to tell how serious the politicians really are. After all Democrat Hillary Clinton was married to the man who signed the Glass-Stegall repeal.

Although GOP nominee Donald Trump’s campaign manager Paul Manafort went out of his way to point the platform change out to reporters on July 18, 2016, The Hill reported. That seems to be a repudiation of the Republicans’ 60 year old free market agenda; which called for less financial regulation and open markets.

It is impossible to tell whether this will lead to actual changes, because the platforms are basically a wish list of stuff the parties think voters want. There is no indication anybody from either party plans to introduce such legislation. Even if they would it might quickly die in the process. To actually restore Glass-Steagall legislation would have to pass both houses of Congress and be signed by the president.

That means the law would have to run a gauntlet of Wall Street lobbyists and libertarian-leaning Republicans in the House. Even if it passed the new Glass-Steagall might be so watered down as to be meaningless.

The danger for Chase is that it would have to sell off a large portion of its business; either investment or consumer banking, to comply with a new Glass-Steagall. That would entail a costly reorganization; and perhaps a move outside the United States.

Despite this threat, Chase is still a really great company with a lot of cash. It will be a good investment with or without Glass-Steagall.