Bo( Kate ) Dong, Stephen Proffer, Gleb Zarkh March 13, 2007

Bo(Kate) Dong, Stephen Proffer, Gleb Zarkh

March 13, 2007

JPMorgan Chase

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Outline

History Macroeconomic view Industry glance Past performance Financial analysis Recommendation

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JP Morgan Chase

One of the oldest and most prestigious financial services firms in the world.

Headquartered in New York City, with assets of $1.3 trillion, JPMorgan Chase is currently the 3rd largest banking institution in US (Behind Citigroup & Bank of American)

Principle Bank subsidiaries: JPMorgan Chase Bank, National Association Chase Bank USA, National Association

Principal Non-Bank Subsidiaries: J.P. Morgan Securities Inc.

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Chemical Banking Corp.

New York Chemical Manufacturing Company was founded in 1823 as a maker of various chemicals

In 1824, the company amended its charter to perform banking activities and created the Chemical Bank of New York

In 1996, the company acquired the Chase Manhattan Corporation and kept that name

In 2000, the company acquired J.P. Morgan & Co. and changed its name to J.P. Morgan Chase & Co.

JPMorgan Chase retains Chemical Bank's headquarters and stock history.

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Chase Manhattan Bank

The Chase Manhattan Bank was formed upon the 1955 purchase of Chase National Bank (established in 1877) by the Bank of the Manhattan Company (established in 1799), the company's oldest predecessor institution. Led by David Rockefeller during the 1970s and the 1980s

Chase Manhattan was one of the largest and most prestigious banking concerns, with leadership positions in syndicated lending, treasury and securities services, credit cards, mortgages, and retail financial services

Weakened by the real estate collapse in the early 1990s, it was acquired by Chemical Bank in 1996

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J.P. Morgan & Company

In 1895, Drexel, Morgan & Co. became J.P. Morgan & Co

It financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world's first billion-dollar corporation

In 1892, the company began to finance the New York, New Haven and Hartford Railroad and led it through a series of acquisitions that made it the dominant railroad transporter

In the 1930s, JPMorgan was forced by the Glass-Steagall Act to choose either commercial banking or investment banking: JPMorgan chose to operate as a commercial bank

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JPMorgan Chase

In 1990s and following amendments to the Glass-Steagall Act, JPMorgan Chase had turned itself into an investment bank too. It also offered private banking and private equity services.

2001- Chase Manhattan acquired JPMorgan & Co. to form JPMorgan Chase & Co.

In 2004, JPMorgan Chase & Co. acquired Bank One Bank One CEO Jamie Dimon becomes president,

COO, and designated successor of current JPMorgan Chase CEO William B. Harrison

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Bank One

Created 1998: Bank One of Ohio merge with First Chicago

Result of over 55 mergers

J.P. Morgan Chase- aggressive acquisition strategy

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Businesses use the JPMorgan brand: Investment Bank Worldwide Securities Services Private Bank Asset Management One Equity Partners Private Client Services

Business under Chase brand: (The U.S. consumer and commercial banking businesses serve customers

under the Chase brand) Credit card Small business Home finance Auto and education finance Insurance

Business under 2 brands

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Business Segments

Investment Bank Retail Financial Services Card Services Commercial Banking Treasury and Securities Services Asset Management Corporate

J.P. Morgan 2006 Annual Report, Pg. 35

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Segment Breakdown

IBED Pg. 34/ Pg. 37 RCMP

Investment Banking Market Share

IBED Pg. 36 RCMP

Investment Banking Financials

Flat Net Income

Record fees


Retail Financial Services

*Additional 339 Branches in New York Tri State (NY, NJ, CT) from Bank of New York Aquisition

IBED Pg. 38 RCMP

Retail Services Financials

Net Income down by 6%

Weaker mortgage results


Card Services

IBED Pg. 43 RCMP

Card Services Financials

Net Income up 68%

Fewer bankruptcy filings

IBED Pg. 34/Pg. 47 RCMP

Commercial Banking

IBED Pg. 46 RCMP

Commercial Banking Financials

Net Income increase by 6%


Treasury & Securities Services

IBED Pg. 48 RCMP

Treasury & Securities Financials

Net Income increased 26%

Driven by market value appreciation


Asset Management

$ 1.3 Trillion under management

IBED Pg. 50 RCMP

Asset Management Financials

Net Income Increased 16%

Driven by market appreciation

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Corporate

Private Equity, Treasury, Corporate Staff units & expenses which are centrally managed

IBED Pg. 53 RCMP

Corporate Financials

Wider net interest spread

Litigation expenses

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Outline


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Economics

Big Picture

Interest Rate

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Big Picture Projection

Global and domestic GDP growth will remain flat or decline slightly

The U.S. economy showing some weakening because of a challenging housing market

Global economy doing relatively well because of robust activity in Asia and areas of the world that produce oil and raw materials.

U.S. Bureau of Economic Analysis. March 12, 2006. <http://www.bea.gov/briefrm/gdp.htm>

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Big Picture(2)-- GDP

U.S. Bureau of Economic Analysis. March 12, 2006. <http://www.bea.gov/briefrm/saving.htm>

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Big Picture(3)-- Consumer deposits

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Economics

Big Picture

Interest Rate

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Interest rate (1)—Long-term interest rate

Longer-term interest rates have risen, contributing to increased borrowing costs for both households and businesses.

Long-term interest rates rose but were still moderate by historical standards, and credit spreads and risk premiums stayed narrow.

Bankrate.com. March 12, 2006 <http://bankrate.com/brm/graphs/graph_trend.asp>

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Interest rates (Mortgage)

Moneycafe.com. March 12,2006. <http://bankrate.com/brm/graphs/graph_trend.asp>

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Interest Rates (Prime)

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Outline


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Industry glance

Mergers and mega-mergers; top 10 U.S. banks control two-thirds of the lending market and deposits

Advises on corporate strategy and structure, raises capital, etc.

Make markets in financial instruments Offers sophisticated risk management services Sales and research across equity, debt, interest

rate, foreign exchange and commodity markets Provides equity and mezzanine capital financing

to companies throughout the business development life cycle

Sources: JP Morgan 2006 10 K

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Outline


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RCMP Portfolio History

Purchased on Oct. 6, 1999 as Bank One for 700 shares

Cost of position- $24,237.45

Market value- $45,128.16 (+86.19%)

Currently own 924 shares

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JPM on S&P 500

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Comparable companies

JPM BAC C WFC IndustryMarket Cap 162.45B 236.61B 249.52B 119.9B 1,142BRevenue (ttm) 56.29B 63.14B 79.78B 32.65BNet income (ttm) 12.61B 19.44B 21.03B 8.23BEPS (ttm) 3.532 4.344 4.646 2.42PE (ttm) 13.26 12.13 10.93 14.68 13PEG (5 year expected) 1.28 1.26 1.18 1.42PS (ttm) 2.91 3.75 3.11 3.67Price 46.83$ 52.69$ 50.78$ 35.53$

Source : Yahoo! Finance

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Outline


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Model assumptions

Step1:Calculation of Equity Cash Flow

Step2: Calculation of Cost of Equity Step3:Calculation of ROE Step4:Calculation of the Equity

Value Step5:Calcualtion of the Price per

share

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Step1:Calculation of Equity Cash

Equity cash flow 2007 2008 2009 2010 2011

Net Income

13,932

13,444

15,424

17,129

14,624

- changes in equity

36,234 -5,545

19,066 -

15,199 88

= equity cash flow -

22,303

18,989 -3,642

32,328

14,536

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Step2: Calculation of Cost of Equity

Cost of equity=

Annualized

rf= 5.25%

β= 0.67

rm= 12.00%

ke= 9.77%

source:http://finance.yahoo.com/q/ks?s=JPM

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Step3:Calculation of ROE(1)

2004 2005* 2006

Net income 4,414 8,470 14,440

Total Equity (including Goodwill) 105,653 107,211 115,790

Goodwill 43,203 43,621 45,186

Total Equity (excluding Goodwill) 62,450 63,590 70,604

ROE including goodwill 4.18% 7.90% 12.47%

ROE excluding goodwill 7.07% 13.32% 20.45%

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2007 2008 2009 2010 2011

Net income 13,932

13,444

15,424

17,129

14,624

Total Equity (including Goodwill)

118,997

113,452

132,518

117,319

117,407

Goodwill 45,397

45,796

46,007

46,445

46,775

Total Equity (excluding Goodwill)

73,600

67,656

86,511

70,874

70,631

ROE including goodwill 11.71% 11.85% 11.64% 14.60% 12.46%

ROE excluding goodwill 18.93% 19.87% 17.83% 24.17% 20.71%

Step3:Calculation of ROE(2)

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Step4:Calculation of the Equity Value

Long-Term Growth Rate=3.50%

Year 1 2 3 4 5

2007 2008 2009 2010 2011 Terminal Value

Net income 13,932 13,444 15,424 17,129 14,624

equity cash flow (22,303) 18,989 (3,642) 32,328 14,536

Distcount factor 0.911 0.830 0.756 0.689 0.627 0.627

Terminal Value 239,859

PVs of Equity Cash Flow -20,317 15,758 -2,753 22,264 8,206 150,483

Total Enterprise Value= 174,555

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Step5:Calcualtion of the Price per share

Total enterprise value over 174,555

Shares outstanding 3,462

+ 10% 55.47

=Price Per Share 50.42

- 10% 45.38

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Outline


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Recommendation for JPM

Hold 924 shares of JP Morgan Chase -JPM owned a strong management

and stable strategy -JPM continued focus on their retail banking division -JPM reduced the non-interest

expenses, especially the operating expenses

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RCMP:

Gleb ZarkhEmail: [email protected]

Stephen ProfferEmail: [email protected]

Bo (Kate) DongEmail :[email protected]

March 12, 2006

Bo( Kate ) Dong, Stephen Proffer, Gleb Zarkh March 13, 2007

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Transcript of Bo( Kate ) Dong, Stephen Proffer, Gleb Zarkh March 13, 2007