M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

McIntire Investment Institute At the University of Virginia

JP Morgan

Prepared by Andrew Kouri| 13 October 2011

NYSE: JPM $30.70

andrew@andrewkouri.com

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Overview

•  One of the oldest banks in US •  Today operate in 60 countries •  Dow 30 Component •  Market Cap: $119B •  Performance throughout 2007-2008 •  CEO ex-Citigroup’s Jamie Dimon

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Key Data

•  P/E: 6.7 •  PEG: .77 •  Price/Book: .68 •  Institutional Ownership: 73% •  Short %: 1.4%

•  Beta: 1.4 •  52 Week High $48.36 •  52 Week Low $27.85 •  EBITDA: $8.12B

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Acquisition Fruition

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

JP Morgan Chase

Chase Manhattan

Bank

Chemical Bank

Many Others…

Chase Manhattan

Bank

JP Morgan & Co

J.P. Morgan & Co

Guaranty Trust of NY

WaMu

Many Others…

Bear Stearns

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Segments

Investment Bank

•  Net Income: $6.6B or 38% of profit

•  Advisory •  Debt & Underwriting •  Market-Making and Trading •  Corporate Lending •  Research

Retail Financial Services

•  Net Income: $2.53B or 14.5% of profit

•  Retail Banking –  Consumer and Business Loans

•  Mortgages •  Auto Loans •  Student Loans •  Real Estate Portfolio

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Segments

Card Services

•  Net Income: $2.07B or 12% of profit

•  Credit Cards •  Merchant Acquiring

Commercial Banking

•  Net Income: $2.08B or 12% of profit

•  Middle Market Banking •  Commercial Term Lending •  Mid-Corporate Banking •  Real Estate Banking

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Segments Treasury & Securities

Services

•  Net Income: $1.08B or 6.2% of profit

•  Treasury Services •  Worldwide Securities

Services

Asset Management

•  Net Income: $1.71B or 10% of profit

•  Private Banking •  Investment management at

the institutional level as well as retail level.

•  Highbridge

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Company Overview Key Data Acquisition Fruition Segments 1,2 Segments 3,4 Segments 5,6

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

10

Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Financial Sector

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Tumult: Past Problems

•  TARP “Scarlet Letter” •  Interest Rates Near Zero •  Euro •  Fed’s Balance Sheet Expanding

– Moral hazard

•  Socialization •  Huge Inefficiencies

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Current Problems

•  Dexia •  ECB Interest Rate? •  Tightening Regulation

– Dodd-Frank

•  PIIGS •  Unrecognized losses hidden from balance sheets

– FDIC Balance Sheet

•  Persistent Unemployment

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

International Dependence

•  I thought this was a US Company? –  17% of Revenue from Europe –  21% of Assets –  JPM Could (and probably will) lose $3B after tax due

to “extremely bad outcomes in all these countries.” •  Although they may not have much Greek exposure, still

exposed throughout the broader economy •  Banking very “Macro-Economic”

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

17

Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Theses

1. Good Management

and Consistent Growth

2. Industry Oversold from EuroFears

3. The Best for the price of the

Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

1. Good Management

and Consistent Growth

2. Industry Oversold from

EuroFears

3. The Best for the price of the Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Management

•  Jamie Dimon, CEO

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A company with a History of shareholder-friendly actions

“Morganization”

Has been JPM CEO since 2004

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Acquisitions

•  Acquisitions -> Growth •  Picked at the remnants from the 2007-08

massacre •  “WaMu has suffered huge losses but still boasts

a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good.” (WSJ)

•  West Coast Exposure •  $1.9B for deposits and branches

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Growth

•  Misperception: Can’t/Not Growing – Prudence throughout tougher times

•  Adding 3 Million new customers every year in retail banking

•  In 2010 opened 174 new branches, hiring more than 3,400 bankers

•  iBanking ROE 17% on $40B of capital. •  Card Services: Net income $2.1B compared with a net

loss of $2.2B in 2009.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e 24

Mrq up 10%

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Commercial Banking Growth

•  In 2010 – Record Revenue of $6 billion, record earnings of $2.1 billion and an ROE of 26% –  “California, Washington, Oregon, Florida and Georgia represent

attractive new growth markets for us. With over 250 dedicated resources in place, this expansion is well under way and has the potential to generate more than $1 billion in additional revenue for Commercial Banking” (Annual Report)

•  Revenue up 6% from last year and balances up 31% (mrq)

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Theses

1. Good Management

and Consistent Growth

2. Industry Oversold from EuroFears

3. The Best for the price of the

Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

1. Good Management and

Consistent Growth

2. Industry Oversold from

EuroFears

3. The Best for the price of the

Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

EuroFear

•  What is it? •  Why does it affect JPM? •  What needs to happen to clear it up?

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Misperceptions

•  We won’t recover •  Home prices will stagnate •  Unemployment will remain high for the next

four years

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Analyst Opinion: Rick Mace, Fidelity Investments

•  Euro is the main source of the problem •  Need to be able to control interest rates on a

per-country basis. •  Just as US taxpayers don’t want to bail out

irresponsible banks, Germans don’t want to bail out Greece.

•  Liabilities hang over the world, all financial institutions linked.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Analyst Opinion: Burl Capital

•  FDIC Premiums are going up, yet interest rates stuck at zero.

•  BAC’s insolvency burden flows to JPM •  Financial Markets intertwined: ¼ of all loans

minted in US wind up somewhere on EU balance sheets

•  Dodd-Frank and new regulations may be why stock appears cheap.

•  Banks are too big to operate efficiently 32

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Theses

1. Good Management

and Consistent Growth

2. Industry Oversold from EuroFears

3. The Best for the price of the

Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

1. Good Management

and Consistent Growth

2. Industry Oversold from EuroFears

3. The Best for the price of the Rest

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M c I n t i r e I n v e s t m e n t I n s t i t u t e 35

Company P/E ROE Profit Margin Dividend Yield (ttm)

JP Morgan 6.1 11.6% 21.8% 3.2%

Deutsche Bank 12.4 5.84% 8.9% 2.8%

BAC n/a -6.73% -21% .64%

Citi 8.05 6% 15.6% .15%

US Bank 11.68 13% 27.4% 2%

Goldman 9.45 10.93% 22% 1.46%

to

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Highest Dividend Yield

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Prudence and Responsibility

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JP Morgan Chase

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

UBS

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Customer Satisfaction

•  Doesn’t matter!

•  But, JPM is still trying to brand its franchise as best it can.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Macro

•  EuroZone bailout plan to be announced “by the end of October”

•  New Government Regulations not yet realized •  Bank of America •  ECB Interest Cut

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Micro

•  Earnings Call Today •  10-K, end of year earnings growth •  Stock buyback

– Money slowly flowing in through hedge funds – Analyst Opinion (1.7) –  Insider Trends

•  Watch dividend

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Presentation Agenda

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Company Overview

Industry Overview

Thesis

Catalysts

Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e

“They are not Wells Fargo when it comes to retail banking. They are not American Express when it comes to credit cards. They are not BlackRock

when it comes to asset management,” said Michael Mayo of Credit Agricole Securities. “And

JPMorgan is not Goldman Sachs in emerging markets.”

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Basil III

•  New regulations can cause inefficiencies on ROE

•  Best House in a Bad Neighborhood •  Dimon has mentioned that JPM does not

“support” the new standards as they inhibit growth.

•  We need to see how they play out

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

PIIGS

•  21% exposure to Europe •  $20B exposure net collateral and hedges •  $3B in losses (more?)

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Lawsuits

•  Will remain a decent cost for the foreseeable future –  Sealink’s Mortgage Backed Security Suit – Lehman’s $8.6B siphoning suit – Wells Fargo (small suit) –  $1B in fees (mrq) – Etc.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Recommendation

•  Based on the results from today, I recommend – Waiting for stock to drop ~5% after other banks

report. –  If JPM rebounds 7-10% on strong volume over the

course of a few days, initiate position.

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M c I n t i r e I n v e s t m e n t I n s t i t u t e

Questions?

•  Preguntas? •  问题？

•  пытанні? •  Fragen?

•  des questions? •  ceisteanna?

•  вопросы? أسئلة؟

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