Financial Performance of JP Morgan Chase and Wells Fargo

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
Name of the Student
Name of the University
Authors Note
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1ACCOUNTING AND FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Economic Analysis:...................................................................................................................2
Industry analysis:.......................................................................................................................3
Company analysis:.....................................................................................................................5
Financial statement analysis:......................................................................................................7
Swot Analysis:...........................................................................................................................9
SWOT Table Analysis of Tables JP Morgan Chase & Wells Fargo:......................................11
Intrinsic Value Analysis:..........................................................................................................12
Price Trend:..............................................................................................................................14
Conclusion:..............................................................................................................................15
Reference..................................................................................................................................16

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Introduction:
The present report is based on evaluating the financial performance of JP Morgan
Chase and Wells Fargo. JP Morgan Chase & Co is regarded as the American multinational
bank and financial service holding firm that has its headquarter while on the other hand Wells
Fargo & Company is also regarded as the American multinational financial service company
that has its headquarter in San Francisco and its centre office is located in US. The reason for
selecting these two companies is because both the companies are operating in the community
banking sector1. The major operations of the company includes the wealth and investment
management.
The report will be evaluating both the companies in respect of the economic
perspective and a detailed industry analysis will be carried out as well. An introductory
company analysis will be performed that will be describing both the companies in terms of
their competitive position. A financial statement analysis containing ratios of last ten years
will be evaluated to gain an insight of the financial position of the firm. The report will also
carry an intrinsic value analysis that will contain the price trend analysis along with the
concluding remarks of the overall performance.
Economic Analysis:
Both the JP Morgan Chase and Wells Fargo & Company operates in the banking
industry. Considering the present economy of US it has grown by 2.1% in the fourth quarter
which is similar to the growth posted in the third quarter. The spending of consumer has
slowed down sharply whereas the net trade in US has made a significant contribution to
growth since the second quarter of 2009 among the decline in imports. As opposed to this,
1 Warren, Carl, and Jeff Jones. Corporate financial accounting. Cengage Learning, 2018.

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negative contributions has been made from the private inventory investment and non-
residential fixed investment2. Taking into the account the entire 2019, the economy of USA
has gained growth by 2.3% which is positive for both JP Morgan Chase and Wells Fargo &
Company.
The economy of US has been growing at an annual rate of 2.1 per cent in the third
quarter on the basis of the estimate of the second quarter after the two percent expansion in
the previous three-month period3. The spending of consumer has also attained growth quicker
than anticipated and the drag arising from the business investment is smaller than previously
reported. Apart from this, the imports have increased quicker and the inventories have
declined. The investment in the homebuilding has been revised lower.
As the Federal Reserve has left the target range for its federal funds remained
unchanged at 1.5 to 1.75 percent, for JP Morgan Chase and Wells Fargo & Company the
present stance of monetary policy is appropriate to support the sustained expansion of the
economic activity. The fed has stated that overnight repo operations would continue to
remain till April 2020 in order to ensure that the supply of reserves remain sufficient.
Industry analysis:
The company which are considered for analysis are JP Morgan Chase and Wellsfargo
which are both engaged in providing banking services to the customers. The banking industry
plays a vital role in day to day operations in the business environment of US. The banking
2 Schroeder, Richard G., Myrtle W. Clark, and Jack M. Cathey. Financial accounting theory
and analysis: text and cases. John Wiley & Sons, 2019.
3 Narayanaswamy, R. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd., 2017.

4ACCOUNTING AND FINANCE
industry basically forms the backbone for economy of USA. There are numerous banks
which are established in the country and therefore the level of competition in the market can
be recognised as intense4. Some of the main competitors of JP Morgan Chase and Wellsfargo
are Citigroup, Bank of America, US Bancorp and several other banks as well. A table
showing the performance and market shares of different banks of USA are listed below:
Figure 1: (Market analysis for different Banks)
Source: (Mordorintelligence.com)
The above table shows that JP Morgan Chase and Wells Fargo are in the top three
banks which are operating in USA which reflects the overall contribution which is made by
such banks. As per the current scenario, the banking industry in USA is looking to expand the
loan or credit facilities which are provided to the client so that it can expand the operations of
4 "An Overview Of The US Banking Sector - Market Realist." Market Realist. N. p., 2019. Web. 25 Feb. 2020.

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the business. As per 2019 estimates the revenue which is generated by banking industry
reached USD 776 billion5.
In terms of current performance of JP Morgan Chase and Wells Fargo, the conditions
are favourable in the market with lot of opportunity of growth. It is further anticipated to
growth due to the innovative implementation of Fintech which is being implemented by
different banks. Therefore, in terms of industry lifecycle, it can be said that the industry is on
its growth phase.
Company analysis:
JP Morgan Chase is regarded as one of the Top banking companies which is set up in
New York as its Headquarters. The bank is regarded as the largest bank in the US while in
terms of assets it is regarded as sixth largest bank in the world6. In terms of revenue
generation, JP Morgan Chase is one of the top banks in 2018 and has generated USD 131.41
billion. Similarly, Wells Fargo also has its origin in USA and has it’s headquarter in San
Francisco in California. This bank is considered to be fourth largest bank in USA. The bank
is recognised for its market capitalization in terms of other banks7.
In terms of market performance both JP Morgan Chase and Wells Fargo are
considered to be market leaders and has large scale of operations which is one of the reason
for the increase in revenue of the business. A graphical representation of the revenue which is
generated by different banks is shown below:
5 "US Banking Sector: Key Trends And Outlook - Market Realist." Market Realist. N. p., 2019. Web. 25 Feb.
2020.
6 Jpmorganchase.com. N. p., 2020. Web. 25 Feb. 2020.
7 Www08.wellsfargomedia.com. N. p., 2020. Web. 25 Feb. 2020.

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Figure 2: Revenue for Different banks in USA
Source: (Mordorintelligence.com)
The above table shows the growth in revenue for different banks which are operating
in USA. The graph shows that JP Morgan Chase and Wells Fargo are in top three positions
which show that in USA market, these banks appropriately performing and the level of
revenue is further expected to enhance due to the recent development in fintech. The level of
competition in the market is quite high however, there is opportunity for banks to achieve
growth in the operations and enhance the revenue of the business8. The financial analysis for
both the companies can be done by referring to the annual report of the company for 2018.
The annual report for JP Morgan Chase for 2018 shows that the revenue for the business has
increased and the overall increase is more than Wells Fargo which shows that in terms of
profitability, JP Morgan is performing better. Both the banks are further aiming to expand the
8 "US Commercial Banking Market- Growth, Trends, And Forecast (2019 - 2024)." Mordorintelligence.com. N.
p., 2020. Web. 25 Feb. 2020.

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operations of the business and generate more revenue by implementing fintech and expanding
their further reach to serve more customers.
Financial statement analysis:

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The financial analysis for both the banks is done with the help of ratio analysis for the
period. The analysis of key financial ratios reveals performance of the business in respect to
different areas which are also considered important for the purpose of taking major decisions
for the business9. The efficiency ratios show the ability of the business to effectively utilize
the resources of the business for enhancing the revenue and profits of the business. In terms
of asset turnover ratio, Wells Fargo has better estimates than JP Morgan Chase. This shows
that the company utilizes the assets of the business in an effective manner. The management
of JP Morgan Chase needs to amend its policies and ensure that the assets of the business are
effectively utilized.
In terms of liquidity, both the banks have a good liquidity situation which is expected
from a bank. In 2019, the current ratio for JP Morgan Chase is shown to be 0.92 and it is 0.87
for Wells Fargo. The liquidity position for JP Morgan Chase is better which also signifies that
the bank would be able to provide more loans and credit facilities to its clients. However, in
terms of liquid cash position Wells Fargo has better estimates which is a sign that the bank
has more cash deposits in comparison to JP Morgan Chase10.
The profitability aspect for both the banks is considered by considering the profit
margin and return on assets and equity during the period. In overall sense, the bank of JP
Morgan Chase has performed better than Wells Fargo in profitability aspect as the overall
return on asset and equity for JP Morgan Chase is more. The profit margin for JP Morgan
Chase is shown to have declined from 2018 estimates for the company but the same is still
9 Dokas, Ioannis, Dimitris Giokas, and Anastasios Tsamis. "Liquidity efficiency in the Greek listed firms: a
financial ratio based on data envelopment analysis." International Journal of Corporate Finance and
Accounting (IJCFA) 1.1 (2014): 40-59.
10 No, Accounting Standard. "Conceptual framework for financial reporting." Norwalk, CT:
FASB (2018).

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better than Wells Fargo in 2019. In overall analysis, it can be said that profit margin for both
the companies has fluctuated significantly over the years11. It is also to be noted that in terms
of market valuation, JP Morgan Chase is better than Wells Fargo which shows that the
investors prefer the banks of JP Morgan Chase more. It is due to this reason that the bank is
in the top position in the industry in USA.
Swot Analysis:
JP Morgan Chase:
Strength:
 Provides good return on capital
expenses. The company is successful
in executing new projects and
produces strong returns on capital
expenses by creating new streams of
revenue.
 Stronger free cash flow provides the
company with resources in hand to
expand in new projects.
 The company has stronger network
of distribution which can reach most
of the potential customers.
Weakness
 There is gap in the range of products
sold by JP Morgan. There is a lack
of choice which offers new
competitor with a foothold in the
market.
 Despite the company is regarded as
the leading organization it is faced
with the challenge of moving in
other segment of products with its
current culture.
 The company is even though
successful in integrating the small
companies but also failed to merge
with different work culture.
Opportunities Threat
11 Agyei-Mensah, Ben Kwame. "The determinants of financial ratio disclosures and quality: Evidence from an
emerging market." International Journal of Accounting and Financial Reporting 5.1 (2015).

10ACCOUNTING AND FINANCE
 The lower rate of inflation
introduces more stability in the
market and allows credit at a lower
rate to the customers.
 The policies related to taxation can
create a significant effect on the way
business is done and can open new
opportunity for the players
established such as JP Morgan.
 The market dilution will result in
competitors advantage and this will
allow JP Morgan to improve its
competitive advantage.
 The laws of liability in different
country is different and JP Morgan
might be exposed to numerous
claims related to liability provided if
there is a change in policy.
 Since JP Morgan is operating several
countries it may be exposed to
currency fluctuations if there is a
volatile climate.
Wells Fargo & Company:
Strength
 The company created a dependable
network of distribution which can
reach most of the potential market.
 It has a strong dealer and
distribution where the dealers are
not only promoting the products of
the company but is also investing in
the training the sales team to extract
maximum benefit.
Weakness
 The company has poor profitability
ratio and net contribution percent is
less than the industry standard.
 The company is not very much
successful in integrating firms that
has different work culture.
 The structure of organization is
companionable with current business
model hence it limits the expansion

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 Wells Fargo & Company has strong
free cash flows which provides
resources in hand of the company to
expand in the new projects.
in the adjacent segments of products.
Opportunities
 The application of new technology
standard and government free trade
agreement has resulted Wells Fargo
& Company with an opportunity of
entering in the new rising market.
 The policy of taxation can
significantly create an effect on the
way of carrying out business and
may also open the new opportunity
for setting new players such as Wells
Fargo & Company to improve its
profitability.
Threat
 Changing consumer behaviour can
be considered as the present threat to
the supply chain model of Wells
Fargo & Company.
 Increasing level of pay particularly
movement in hourly rate can
increase the price and may
negatively affect the profitability.
SWOT Table Analysis of Tables JP Morgan Chase & Wells Fargo:
Strength
 Both the JP has the successful track
record of developing new products.
 Automation of business activities
has introduced consistency and
quality to the products of both JP
Weakness
 The companies suffers from gaps in
their product range and this lack of
choice can lead to new competitor to
obtain foothold in the market.
 The company faces limited success

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Morgan and Wells Fargo products.
 Both the companies have created a
reliable distribution network which
can reach most of the potential
market.
outside of its core business
activities.
 The ratio of profitability and net
contribution is less than the average
industry standard.
Opportunities
 The market dilution will result in
competitor’s advantage and this will
allow JP Morgan to improve its
competitive advantage.
Threat
 As JP Morgan Chase & Wells Fargo
is operating several countries it may
be exposed to currency fluctuations
if there is a volatile climate.
Intrinsic Value Analysis:
The intrinsic value of the JP Morgan Chase and Wells Fargo has been determined
with the help of the Dividend Discount Model whereby important and relevant factors like
the Cost of Capital, Dividend History and the Share Price of the respective company. In order
to value the intrinsic value of the company the concept of dividend discount model has been
applied whereby the formula used is as follows:
Intrinsic Value (I.V): Do*(1+g)/(K-g).
The value of both the shares has been respectively determined and the same has been
well compared with the current prevailing share price of the company12. It is important to
note that the cost of equity has been determined via both the approaches like the dividend
discount model and Capital Asset Pricing Model (CAPM) and the model which gave us a
12 Www08.Wellsfargomedia.Com, 2020, https://www08.wellsfargomedia.com/assets/pdf/about/investor-
relations/earnings/fourth-quarter-2019-earnings.pdf. Accessed 25 Feb 2020.

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higher value was further considered for computing the WACC. It is important to note that the
intrinsic value of the JP Morgan Chase Company was around $76.19 and the market price of
the share price was determined to be around $132.1613. On the other hand side, the intrinsic
value of the Wells Fargo was around $53.8 and the market price of the share price was
determined to be around $46.39. It is important to note that the differences in the share prices
of the company has been well because of the difference in market perception and valuation
that is done by the investors and market in respect to the company.
13 Jpmorganchase.Com, 2020, https://www.jpmorganchase.com/corporate/investor-relations/document/
684e995c-fa63-4031-9da4-7e2eb76218ab.pdf. Accessed 25 Feb 2020.

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Price Trend:
The share price trend of JP Morgan suggest that the company has not reported a
volatile trend in the last 12 months. The company simply exceeds the US bank industry as it
has successfully managed to return beyond 6.9% in the past. Furthermore JP Morgan Chase
has also exceeded the US Market that returned beyond 14% over the past. Investors that are
looking for growth in their portfolio might want to take into account the prospects of an
organization prior to purchasing the shares14. Purchasing a great company having a robust
outlook at the cheap price is always a better idea for investment. As the shares of JP Morgan
is trading near to its fair value, the positive outlook simplifies that it is worth diving deeper in
the other factors namely the balance sheet strength in order to take the advantage of the next
price drop.
Figure 3: JP Morgan Chase Share Price
Source: (Yahoo Finance 2020)
14 Pratt, Jamie. Financial accounting in an economic context. John Wiley & Sons, 2016.

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Wells Fargo over the last three months has not reported any significant drop in price.
Wells Fargo & Co has exceeded the returned of 9.8% in the banking industry over the last
twelve months. Wells Fargo has also exceeded the US market that returned 17.8% over the
last twelve months. The shares of the Wells Fargo is undervalued and its price is relative to
the market value.
Figure 4: Figure Showing share price of Wells Fargo
Source: (Yahoo Finance 2020)
Conclusion:
On a conclusive note, the share price of the Wells Fargo has been trading below the
fair value. The company is trading below the estimated value of fair value $1692.92. Wells
Fargo is trading below the fair but not by significant amount. Wells Fargo is considered as
based on the good value on PE ratio in comparison the banks industry average of 12.6 times.
On the other hand, Chase has seen its share price hovering around a small range of US$128 to
$US141 over the last few weeks. Conclusively, it must be stated that JP Morgan has
represented a more positive outlook which implies that it is worth diving deep in other factors
particularly its balance sheet as this will help the investors in taking advantage of higher
earnings.

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Reference
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Web. 25 Feb. 2020.
"Annual Report And Proxy | Jpmorgan Chase & Co.". Jpmorgan Chase & Co., 2020,
https://www.jpmorganchase.com/corporate/investor-relations/annual-report-proxy.htm.
Accessed 25 Feb 2020.
"Bloomberg". Bloomberg.Com, 2020,
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us. Accessed 25 Feb
2020.
"US Banking Sector: Key Trends And Outlook - Market Realist." Market Realist. N. p.,
2019. Web. 25 Feb. 2020.
"US Commercial Banking Market- Growth, Trends, And Forecast (2019 -
2024)." Mordorintelligence.com. N. p., 2020. Web. 25 Feb. 2020.
Agyei-Mensah, Ben Kwame. "The determinants of financial ratio disclosures and quality:
Evidence from an emerging market." International Journal of Accounting and Financial
Reporting 5.1 (2015).
Dokas, Ioannis, Dimitris Giokas, and Anastasios Tsamis. "Liquidity efficiency in the Greek
listed firms: a financial ratio based on data envelopment analysis." International Journal of
Corporate Finance and Accounting (IJCFA) 1.1 (2014): 40-59.
Jpmorganchase.Com, 2020,
https://www.jpmorganchase.com/corporate/investor-relations/document/684e995c-fa63-
4031-9da4-7e2eb76218ab.pdf. Accessed 25 Feb 2020.
Jpmorganchase.com. N. p., 2020. Web. 25 Feb. 2020.

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Narayanaswamy, R. Financial accounting: a managerial perspective. PHI Learning Pvt. Ltd.,
2017.
No, Accounting Standard. "Conceptual framework for financial reporting." Norwalk, CT:
FASB (2018).
Pratt, Jamie. Financial accounting in an economic context. John Wiley & Sons, 2016.
Schroeder, Richard G., Myrtle W. Clark, and Jack M. Cathey. Financial accounting theory
and analysis: text and cases. John Wiley & Sons, 2019.
Warren, Carl, and Jeff Jones. Corporate financial accounting. Cengage Learning, 2018.
Www08.Wellsfargomedia.Com, 2020,
https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/earnings/fourth-
quarter-2019-earnings.pdf. Accessed 25 Feb 2020.
Www08.wellsfargomedia.com. N. p., 2020. Web. 25 Feb. 2020.