Market Commentary: Papa Jamie’s Empire Is a Money Machine
Over this past weekend news came out that JP Morgan had acquired “a substantial majority of assets” and all deposits of First Republic Bank.
The second largest bank failure in US history had threatened to cause a contagion that would spread like wildfire throughout the banking system but Papa Jamie Dimon came to the rescue with the proverbial firehose. The rescue was needed after First Republic had announced a much steeper outflow of deposits in March than was originally forecast.
Now the attention turns to JP Morgan, was this a good deal? Was it ever? Here’s why you might want to align yourself with Jamie Dimon as a JP Morgan shareholder.
Key Points
- JP Morgan acquired First Republic Bank and now oversees more than 10% of all US deposits
- The First Republic deal added billions to JP Morgan’s net equity line and was immediately acretive to earnings
- JPM financial should look even better going forward, and the share price is likely to follow
Did JP Morgan Get A Deal?
There is just no substitute for good leadership and JP Morgan shareholders are fortunate to have a wise and savvy boss at the helm. That was on full display recently when details of the deal were released. Here are the highlights:
- JP Morgan acquired a substantial majority of assets and certain liabilities
- $173B of loans and $30B of securities
- $92B of deposits and $28B of FHLB advances
- Did not assume corporate debt or preferred shares
- JP Morgan will pay the FDIC $10.6B
- FDIC will provide loss share agreements:
- single family residential mortgages: 80% loss coverage for 7 years
- commercial loans, including CRE: 80% loss coverage for 5 years
- FDIC will provide $50B 5-year fixed-rate term financing
Ok what does it all mean?
By our calculations, JP Morgan pays $10.6B for $18B in net equity, a deal! Plus, management says the deal is $500M acretive to net income and has a 20%+ IRR with a $2.6B post-tax profit to be recognized immediately before accounting for restructuring costs.
Why JP Morgan Is So Attractive
We covered JP Morgan recently when we revealed it was set to 12x net income on the back of massive deposit flows into its bank as consumers feared smaller, regional banks like Silicon Valley Bank.
Add to that an acretive acquisition of First Republic Bank that immediately boosts equity, and you can see 2023 has been a banner year for JP Morgan, and Summer hasn’t hit full bloom yet.
Amazingly, with all this good news, JP Morgan share price is only now on the verge of eclipsing its high of the year set in early January. Analysts are clearly bullish too on the Jamie Dimon’s empire – more than ever before it’s a money machine – and have placed a $158 price target on the shares. That’s the consensus among 24 analysts with the high of the range sitting at $192 per share, don’t bet against it.
According to the Bear Traps report, the deal resulted in JP Morgan commanding more than a 10% share of all US deposits. That’s an extraordinary concentration in a single bank, and surely places JP Morgan firmly in the “too big too fail” category.
The company’s share price sits about $20 higher than it did 5 years ago. Since then, revenues have grown close to 18% and operating income is up 15%. We think those numbers will all look better soon. Whether the share price follows is a function of other factors including the macro environment and general market sentiment. When looking in the rearview mirror 5 years from now, we’ll be surprised if the share price doesn’t look a whole lot better than it did 5 years ago.
