JPMorgan Chase & Co., the biggest U.S. bank by assets, reclaimed the No. 1 title by market value as the impact of last year’s wrong-way bet on derivatives fades and investors wager on an investment-banking rebound.
JPMorgan shares rose 1.6% this week, valuing the bank at $184.9 billion through yesterday. That eclipsed the $184.2 billion for Wells Fargo & Co., which slipped to No. 2 on Feb. 5 after being the most valuable since Oct. 28, 2011, according to data compiled by Bloomberg.
The recovery shows JPMorgan CEO Jamie Dimon has blunted fallout from last year’s trading loss, which wiped out as much as $51 billion in shareholder value. Wells Fargo, led by CEO John Stumpf has seen the rise of its shares slow amid investor concerns that weaker mortgage lending and shrinking margins will crimp profit.
“Capital-market firms like JPMorgan have been burdened quite heavily by the financial debacle, more so than regional or national banks like Wells Fargo,” said Gerard Cassidy, an analyst at RBC Capital Markets. “As they continue to throw the baggage overboard, all of these legacy issues that have been hampering profit are going away. Owning the riskier names is more attractive today in this economy.”
Investors should bypass regional lenders for universal banks such as New York-based JPMorgan because the larger firms have lower price-to-earnings and price-to-book ratios and the Federal Reserve’s bond purchases will encourage trading and hurt lending spreads, David Konrad, a KBW Inc. analyst, said in his 2013 outlook.
JPMorgan has gained 11% this year, outpacing Wells Fargo’s 2.3% advance and the 7.3% climb for the 24-company KBW Bank Index. JPMorgan trades at 0.95 times book value, a measure of assets minus liabilities, compared with 1.27 for San Francisco-based Wells Fargo.
“If you are less worried about risk you will start to bid up these shares, which are trading at below book,” said Jennifer Thompson, an analyst at Portales Partners LLC. “That’s where you will focus in terms of relative upside.”
JPMorgan lost more than $6.2 billion in the first nine months of last year from trades on credit derivatives made at its chief investment office in London. The trader who amassed the position came to be known as the London Whale because the bets were big enough to move the market.
The bank first disclosed losses from the wagers in May, almost a month after Dimon dismissed initial news reports on the wagers as a “tempest in a teapot.” Dimon, whose pay was cut 50% this year to $11.5 million, said last month that the company is almost done booking losses from the trades.
“JPMorgan sustained a black eye, as did Jamie Dimon,” Cassidy said. Now “the market has given its verdict: the London Whale was a trading problem that was blown out of proportion and now it’s been put back into perspective.”
Deutsche Bank AG analysts led by Matt O’Connor upgraded JPMorgan to buy from hold on Jan. 25, citing a 30% underperformance in the shares compared with global banks since early August. JPMorgan, which posted a third straight year of record profit with $21.3 billion for 2012, may see annual operating expenses drop as much as $5 billion as costs to service mortgages fall, the analysts said in a note to clients.
Wells Fargo’s mortgage revenue, which helped the lender report record profit of $18.9 billion last year, may decline 18% this year to $10 billion from 2012 once loan repurchases are discounted, Richard Staite, an analyst at Atlantic Equities LLP, wrote in a Jan. 29 research note.