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J.P. Morgan’s Returns Are Stable but Low

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Comparatively better returns on equity

J.P. Morgan’s (JPM) returns on equity, or ROE, are the second-highest of the big four banks, following Wells Fargo (WFC). This has been the case for quite a few years now. With ~9.8%, J.P. Morgan’s returns are higher than those of Bank of America (BAC) and Citigroup (C).

Together, these banks form ~27% of the Financial Select Sector SPDR ETF (XLF).

While Wells Fargo’s ROE is showing a slight upward trend, J.P. Morgan’s is flat, moving up and down within a narrow range. It’s interesting to note that J.P. Morgan’s returns showed more stability during the crisis than those of its peers. The graph above shows returns on equity for the four banks over the last ten years.

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One thing contributing to Wells Fargo’s higher ROE might be its focus on core banking activities. JPM’s Consumer and Community Banking segment, which is most comparable to Wells Fargo in terms of business, has a higher historical ROE than its Corporate and Investment Banking segment does. Wells Fargo has very limited operations in investment banking and related businesses.

Total returns underperform banking sector indices

J.P. Morgan’s total returns have been lower than those of the KBW Bank Index and the S&P Financial Index for the last five years. The KBW Bank Index is a market-cap-weighted index representing major US banks and money centers. The S&P Financial Index consists of financial sector companies from the S&P 500 Index.

The two indices marginally underperformed the S&P 500 Index over the past five years, reflecting the underperformance of the banking sector following the crisis.

J.P. Morgan’s returns underperformed the two indices. The graph above compares the five-year cumulative total return for J.P. Morgan common stock with those for the S&P 500 Index, the KBW Bank Index, and the S&P Financial Index.

Below-average returns

J.P. Morgan, like other banks, is making efforts to improve its performance following the crisis. While some banks like Wells Fargo are leading the recovery, others, including Bank of America and Citigroup, are still struggling. J.P. Morgan still needs to do a lot to improve its return performance.

Higher litigation expenses partially contributed to J.P. Morgan’s lower returns in recent years. Its consistently lower returns have prompted debate about whether it’s time to break up the firm.

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