rd80 (99.11)

JPM Leads Banks Higher – Should it?

October 14, 2009 – Comments (3) | RELATED TICKERS: JPM

The Fool’s Morgan Housel took a look Inside JP Morgan Chase’s Earnings report today and found that investment banking accounted for over half of that glowing earnings report.  Other operating segments were mixed news.

Morgan notes that since most other banks don’t have JPM’s Investment Banking operation, these results shouldn’t be taken as good news for other banks.  “But continuing trouble from credit losses doesn't bode well for banks with less robust investment banking divisions, and banks where the primary focus leans heavily toward traditional lending.”

Mr. Market didn’t agree.  The day’s results for the big four banks?

BAC    +4.38%
WFC    +4.26%
C         +3.52%
JPM     +3.29%

Note that JPM had the worst performance among the big four banks even though it has the strongest investment banking business and that’s the only part of the banking business that’s performing well.

To get a broader picture of today’s bank stock performance, I went to my alter ego, TARPedBanks.  After some copy-paste to a spreadsheet, I got an average one-day gain across the 113 active picks of 2.26%.  39 of those 113 companies beat JPM’s performance today.  (The 39 include BAC, WFC and C).

The earnings report still shows signs of economic trouble.  Things may be getting worse at a slower rate, but there are still plenty of things getting worse.  The slides that accompanied the earnings report showed increases in non-performing loans from the previous quarter and higher charge-off rates for prime and sub-prime mortgages.  Home equity charge-off rates did improve over the second quarter.  Slide 17 shows delinquency trend charts for mortgages and credit cards.  It doesn’t look like things are getting better – less worse maybe, but not improving.

The earnings report is positive for JPM.  They’re demonstrating that they can earn their way through problem loans.  However, I don’t understand the other banks showing stronger market moves than JPM.  It’s reasonable to assume they will see similar loan charge-off trends to what JPM reported, but they don’t have JPM’s strong investment banking operation to help deliver results. 

I sold most of my WFC a while back and had been wondering if it’s time to suck it up and buy it back higher.  After looking over the JPM results, I think I’ll wait a while longer.

If anyone has a theory on why C, BAC and WFC outperformed JPM today, please feel free to add a comment.