Looking at the differences between JP Morgan Chase and Bank of America
In the year 2009, the net income of Bank of America was recorded at $6.3 billion, as compared to the low net income of the firm of $4.0 billion in the year 2008. This included the preferred stock dividends of the banking firm and the impact of the repayment of the government of the United States of $45 billion investment in preferred stocks in the corporation under the TARP program or the Troubled Asset Relief Program. Their combination resulted to a net loss for common shareholders of $2.2 billion or $0.29 per diluted share. Those outcomes are not far from the 2008 net income applicable to the common shareholders of the corporation amounting to $2.6 billion or equivalent to $0.54 per diluted share. On the other end, revenues, which is the net of interest expense on an FTE basis or fully-taxable equivalent increased to $120.9 billion that represented a 63 percent rise from $74 billion in the fiscal year of 2008 that reflected partly the acquisition of Merrill Lynch and impact in full-year term of Countrywide. Meanwhile, net interest income on the basis of fully-taxable equivalent rose to $48.4 billion as compared to only $46.6 billion in the year 2008. This increase could be an outcome of the optimistic rate environment, improved outcomes of the hedging facilities, and the bank’s acquisitions of Merrill Lynch and Countryside.
Lower ALM or asset and liability management portfolio levels, lower loan balances of consumers, and increase in non-performing loans also provide the boost for the net interest income of the firm. Also contributory to the firm’s rise in net income was the narrowing of the company’s net interest yield to 33 basis points or 33 bps equivalent to 2.65 percent decline. Meanwhile, noninterest income increased to $72.5 billion as compared to the low performance in 2008 of $27.4 billion. This increased in noninterest income was attributed to the increases in trading account profits, higher income in equity investments, augmented brokerage and investment services fees and income in investment banking which was reflected with the acquisition of Merrill Lynch while higher insurance income and mortgage banking with the full-year effect of acquiring Countrywide. In the meantime, the sales of debt securities gained with the bank’s collateralized mortgage obligations and the sales from the agency MBS. Pre-tax gains were also generated to reach a total of $7.3 billion that benefited the income on equity investment of the firm specifically relevant to the sale of the investment portion on the CCB or China Construction Bank and a pre-tax gain of around $1.1 billion on the company’s investment in BlackRock Inc. Additionally, profits in trading account benefited from the decline of write downs on legacy assets of $6.5 billion as compared to year 2008. The other category of income entailed a $3.8 billion gain attributed from the contribution of the merchant processing business of the company to a significant joint venture. However, this was partially counterbalance by the decline in the income on cards of $5 billion primarily due to the higher losses on securitized credit card loans and lower income on fees.
Noninterest income of the banking firm was also negatively affected by the $4.9 billion in net losses on the structured notes of Merrill Lynch linked to adjustments on credit valuation. As a result, credit losses provision was at $48.6 billion which was an increase of $21.7 billion compared to the prior year that reflected the deterioration of the housing markets and the general economy of the United States which pushed for higher costs of credit in both the consumer and commercial portfolios of the firm. In the same manner, higher reserve additions lead to increased weakening in the portfolios of purchased impaired consumer gained through acquisitions, wide-ranging deterioration of the company’s core commercial portfolio and the deterioration’s impact on the residential mortgage portfolio and in the housing markets. As a result, noninterest expense ballooned to $66.7 billion as compared to $41.5 billion in the year 2008. Meanwhile, general operating expenses like personnel costs increased due to the acquirement of Merrill Lynch and Countrywide’s full year impact. The restructuring charges and the pre-tax mergers increased by $2.7 billion from $935 million in the year 2008 due to the purchased of Merrill Lynch (DePamphilis, 2009). At the end of 2009, Bank of America realized a tax benefit of $1.9 billion compared with the tax expenditure of $420 million in the year 2008. The decline in tax expenses were due to the benefits derived by the company on government taxation as well as the changes in the geographic mix of company’s earnings driven by the acquisition of Merrill Lynch.
Leases and loans net charge-off rations augmented in all commercial portfolios of the firm. In particular, the increased in the net charge-offs of the commercial real estate during the 2009 period was due to the performance of the portfolios of the non-homebuilder and homebuilder, although the net charge-offs of homebuilder portfolio declined in the 2nd half of the year compared to the 1st half. Meanwhile, increases in commercial and domestic as well as foreign net charge-offs were spread in terms of industries and borrowers. The NPL or the nonperforming loans, foreclosed properties and leases and the utilization of reservable criticized ratios for the portfolio of homebuilders were 42.16 percent and 74.44 percent at the end of the year 2009 as compared to the 27.07 percent and 66.33 percent by the end of 2008. Lower exposures and loan balances in the previous year has driven an aspect of the increase in the financial ratios. Consequently, net-charge offs for the portfolio of homebuilder increased by $524 million by the end of 2009.
Stock Performance of Bank of America
Bank of America is listed at the Dow Jones Industrial Average with its share currently selling at $1.78 which is less that the fiscal year ending of 2008. The reason for the decline of the stock price of the company could be rooted from the scare of the housing market and the continuously failing performance of the banking industry. At present, Bank of America’s stock is having a mean value of $3.44 per share after the fiscal year of 2009. This meant that the share price is estimated to increase by $2.91 per share from where the stock price and is predicted to increase by $1.13 by the end of fiscal year 2010. Despite of the poor performance of the stock price of the company, the bank was still able to acquire Countrywide showing the real value of the company’s stock despite of the poor performance of the acquired company. Meanwhile, year-end average equity of shareholders gone up by $54.4 billion and $79.8 billion due to the common stock offering of $13.5 billion and $29.1 billion of common and preferred stock which were issued in relation to the acquisition of Merrill Lynch, CES issuance of $19.2 billion, increased in the accumulated OCI or other comprehensive income or net income. These increases however were partially counterbalanced by the repayment of the preferred stock of TARP amounting to $45 billion; $30 billion of it was issued in the early part of 2009 and higher dividend payments of preferred stocks (Bank of America Annual Report, 2009). Likewise, increases in the accumulated OCI were due to gains that were unrealized on marketable equity securities and AFS debt. Average equity of shareholders was also impacted with the decline of the company’s stock price and warrants of common stocks amounting to $30 billion in the early part of 2009. This was an aspect of the repayment of the TARP in the end of month of 2009.
The common stock price of Bank of America was consistent with common stock prices in the industry of financial services that experienced volatility for the past 18 months primarily attributed to the financial markets deterioration as the general economy moved into a recession in 2008 followed by the stabilization programs of the government in the following year. During this period, the bank’s market capitalization remained at low points based on the company’s recorded book value. In particular, the fair value of all units reporting as of June 30, 2009 was expected to be at $262.8 billion based on the impairment test and the market capitalization of the common stock of the corporation as of the mentioned date at $114.2 billion totaling to $149.6 billion as of December 31, 2009 including the CES. Meanwhile, the implied control premium or the amount that the buyer of a stock is willing to pay over the present market price of a stock that is publicly traded to acquire significant control was at 52 percent after considering the preferred stock outstanding of $58.7 billion by the end of June 30, 2009. As none of the company’s reporting units were traded publicly, the determinations of the fair value of the reporting unit are not directly linked to the stock price of the corporation.
JP Morgan Chase Bank’s Historical Development
Chase Bank has gone through various transformations since late 18th century. Gauged by contemporary standards, the initial incarnation was The Chase Manhattan Bank, which was considered as a highly booming financial institution with an impressive global reputation (Fombrun, Tichy, and Devanna, 1984). Several banks in the United States had impenetrability adjusting to the innovative system of competitive interest rates (Markham, 2002). Founded by Alexander Hamilton and Aaron Burr, Chase Manhattan Bank commenced from the merger of Chase National and the Bank of The Manhattan Company, the third and the fifteenth largest domestic banks at that time. Chase operates with more than 100 countries and transactions in scores of exchanges, and significantly plays a major position in international trade and venture. Over those years, the bank is one of the exceptionally few financial world institutions that are competent of foreseeing customer demands and responding to them promptly and effectively as of any one of the major financial centers in the world (Geisst, 2006). During the years of 1961 to 1969, Chase is the first bank to completely computerize check-handling processes, and is exclusively of the first banks generally to provide computer-based services in the structure of tax return operations, airline ticket management, and rent assortment (Fombrun, Tichy, and Devanna, 1984). From the focus of domestic banking to overseas banking, Chase pushed to extend business in global perspective and introduce modern management methods. David Rockefeller, who was the Chief Executive Officer (CEO) pushed to rationalize Chase banking system. With just little span of time from its third rank following Citigroup and Bank of America; Chase became the largest bank in the country with assets of $1 billion (Geisst, 2006).
Balance Sheet and Income Statement of JP Morgan Chase
JP Morgan Chase or JPM was able to report a net income of US$12 billion in the year 2009 with its earnings in the fourth quarter amounting to US$3.3 billion. These outcomes of the income of the firm is considered to be significant to boosts its profitability. Nevertheless, the income generated by the company in that year was short in its predictions especially in the areas of potential earnings and sufficiency of capital returns. The banking firm significantly benefited from its earnings in the business areas of investment banking, commercial banking and retail banking. Likewise, other growth contributors included the production of new products and services like checking accounts and new credit cards. The CEO and Chairman of the banking firm Jamie Dimon commented that the firm’s earnings for the last quarter of the year 2009 was further supported by its credit reserves amounting to US$33 billion or almost equal to 5.5 percent of its total loans (JP Morgan Chase and Company, 2009). Additional capital being given to the company also boosted its earnings that allowed it to reached an 8.8 percent Tier 1 Common
Ratio and Tier 1 Capital Ratio
Meanwhile, the last quarter of the year 2009 was listed at US$1.9 billion that augmented by almost US$4.3 billion as compared to 2008. Contributors to this boost in income of the company included investment banking and the increases in advisory fees. In particular, advisory fees was up by US$611 million or equivalent to an increased of 6 percent. The increased on investment banking fees reached to a top at US$1.9 billion while equity underwriting fees were also at its peak at US$549 million and up by 66 percent (Christie, 2008).). Net income for 2009 therefore reached at US$25 billion as compared to the US$12 billion performance in the year 2008. These net earnings included the performance of the company in its dividends in preferred stock and the eventual effect of the compensation of the United States government of around US$45 billion of investment on the company’s preferred stock under the supervision of the Troubled Asset Relief Program or TARP. However, the merger of these funds resulted to an income loss for shareholders in the common stock equivalent to US$0.29 per diluted share or US$2.2 billion.
These earnings of the shareholders of the firm were almost the same with that of the net income outcomes of 2008 that is equivalent to US$0.54 per diluted share or US$2.6 billion. On other respects, the revenues of the firm which is known as the total of interest expenses on a fully taxable equivalent or FTE basis recorded a 63 percent increased that amounted to US$120.9 billion as compared to the 2008 revenue performance of only US$74 billion that partly recognized the acquirement of Chase and its full year term impact on the performance of the firm. In the meantime, net income that is fully taxable increased by US$48.4 billion that increased against the 2008 record of US$46.6 billion.
Financial Ratios of JP Morgan Chase
Commercial portfolios of the company were boosted by the firm’s loans and leases. To be specific, the increased in the commercial real estate’s total charge-offs during the fiscal year of 2009 was mainly attributed to the delivery of high performance of the homebuilders portfolio as well as those of non-homebuilders. However, the remaining charge-offs of these portfolios declined by on the first two quarters of 2009. The spread of both foreign and domestic charge-offs were due to the increases attributed from various borrowers industries. Foreclosure of leases and properties, deployment of ratios that are criticized and the continued boost of nonperforming loans resulted to a decline of homebuilder portfolio by 42 percent and 74.44 percent by the end of the fiscal year of 2009. In the meantime, balances on loans and low exposure to risks have pushed the company’s financial ratios to greater heights. As a result, homebuilders and their portfolio reached their remaining charge-offs at around US$524 million at the end of the fiscal year of 2009.
JP Morgan Chase and its Stock Performance
The banking firm JP Morgan Chase is considered a public company with its stocks listed at the Dow Jones Industrial Average Component. JP Morgan is currently selling its shares of stocks at US$39.31 which is higher than the previous fiscal year. With these increases in the price of stock of the firm, the company was able to acquire various assets like the Collegiate Funding Services which is a private equity firm owned by Lightyear Capital for a sale total of US$663 million. The company was also able to swap its assets in the small business and retail banking capacity of The Bank of New York Company that provided the company the accessibility to a total of 338 new branches and 700,000 fresh customers in Indiana, New Jersey and New York. ClimateCare was also acquired by the firm especially with the good performance of its stock in the stock market. The mentioned company is known to be engaged in the business of carbon offsetting and is based in the United Kingdom. Meanwhile, the stock price of the firm is expected to increase by an average of US$2.91 per share and the year-end of 2010 is expects a stock price increase of US$1.13.
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