For better or worse, banking and bank stocks are back in a big way. Both revenues and income are shooting up at JPMorgan Chase (NYSE: JPM) – America’s largest bank.
Chase’s revenues increased by $1.09 billion during second quarter 2017; the monster bank reported $97.10 billion in revenues in March 2017, and $98.19 billion at the end of June. Income also rose from $25.66 billion in March to $26.59 billion in June; an increase of $930 million.
It looks business is booming at Chase, but all is far from well there. The bank reported a “free cash flow” of -$20.04 billion in March 2017.
Chase’s Business is Sound
Judging by the financial numbers I found at ycharts, I would say that Chase’s core business is sound but it has some structural problems. The bank is making a lot of money but it still has the potential for massive losses.
Chase reported liabilities of $2.305 trillion on June 30, 2017, which almost equaled the $2.53 trillion in assets it reported on the same day. That makes a very good case for breaking up the monster banks. The risks they are accumulating might be too great for anybody, even the government to manage or insure.
Yet it does not answer the principal valuable questions: is Chase making money and is JPM is a safe investment? I would say the answer to both questions is yes, but Chase is not for the risk averse or the faint of heart.
Chase is making a lot of Money
Chase is a good value investment right now, simply because it is making a lot of money despite the negative free cash flow. These numbers show us that the megabank is swimming in the cash:
- Cash and short-term investments of $449.16 billion on June 30, 2017.
- Generating $88.29 billion from financing during first quarter 2017.
- $21.54 billion cash from operations on March 31, 2017.
- A market capitalization of $323.89 billion on July 26, 2017.
- An enterprise value of $249.59 billion on July 26, 2017.
This means Chase is a really good value investment because it is capable of generating a lot of money to cover dividends. The 50¢ dividend paid out on July 3, 2017, should be safe for some time to come and increase. It’s also likely to increase in the future because JPMorgan Chase paid a dividend of 48¢ on January 4, 2017.
Chase is also something of a growth stock because its investors received an 11.57% return on equity on June 30, 2017. All this makes Chase a really good income stock, albeit a very risky one that I would not recommend for widows and orphans.
JPMorgan’s next Cash Cow: Chase Pay
Another reason why I really like Chase is that it has a potential cash cow in the form of Chase Pay.
Chase Pay is a quick read (QR) code driven payment app that is very similar to Ant Financial’s Alipay. Ant Financial is widely viewed as one of the world’s most valuable unicorns (pre-IPO companies) with an estimated worth of $70 billion. Most of that value comes from Alipay; China’s most popular digital wallet.
QR code driven apps like Alipay and Chase Pay allow payment with balances through mobile phones just Apple Pay or Android Pay. A customer can use those apps to access a bank account or a credit card balance. In both systems the payments anonymity and security is protected by the generation a unique encrypted payment token.
The big difference is in how QR code apps communicate with the cash register. A QR code app uses the phone’s camera to scam a barcode generated by the register. This authorizes payment from the financial institution supporting the app to the merchant via the financial institution’s system.
Theoretically the QR code provides an added layer of security which might be why Walmart (NYSE: WMT) accepts QR-code apps but not NFC digital wallets like Apple Pay. Apple Pay, Android Pay and Samsung Pay use a technology called Near Field Communications (NFC) to communicate with registers.
An NFC app establishes a direction connection with the merchant’s payment system via a wireless signal. It then makes the transaction in the merchant’s system, which can create a big security risk. This might be why major U.S. retailers like Walmart and Kroger (NYSE: KR) and big French banks are refusing to work with Apple Pay and Android Pay.
Tellingly Walmart; America’s largest retailer with 4,177 stores has announced that it will accept Chase Pay and integrate Chase Pay with its payment solution Walmart Pay. That means people will be able to pay with Chase pay at a place where almost every average American shops on a regular basis.
Currently customers can use Chase Pay at Walmart.com but not the retailer’s brick and mortar locations. No announcement about when Chase Pay can be used at Walmart and Sam’s Clubs locations has been made.
PayPal Supports Chase Pay
More importantly America’s most popular digital wallet PayPal (NASDAQ: PYPL) will support Chase Pay.
Chase Pay will be integrated with both PayPal’s digital wallet and the Braintree merchant platform, TechCrunch reported. That means Chase Pay users might be able to use the app to pay at merchants will Braintree accounts.
What’s more interesting is that customers will be able to earn Chase rewards points with PayPal transactions. PayPal on Chase Pay will not be available until next year which might between Chase Pay is finally rolled out to U.S. merchants and phone users.
Chase can make money via Chase Pay by charging a 2.9%; or 30¢, transaction fee like PayPal does. A great way for Chase to attract customers would be to make Chase Pay transactions free for its account holders and to reimburse PayPal transaction fees.
Chase Pay is potentially a major income stream fee because of the growing popularity of digital wallets and payment apps. Apple CEO Tim Cook claimed that Apple Pay’s payment volume grew by 450% in 2016 in April 2017.
PayPal is growing even faster it gained six million new active users during first quarter 2017, Statista data indicates. PayPal reported 197 million users at the end of 2016, and 203 million in March.
All this means that JPMorgan Chase is about to tap a new consumer banking market with tremendous growth potential. Even if it is not as successful as Alipay, PayPal or Apple Pay Chase Pay might be a huge revenue generator. That makes Chase an excellent value investment in fintech’s future.