JP Morgan Chase Financial Analysis (Coursework Sample)
Analyze JPMorgan Chase Financial perfromance for the last 3 years and credit qualitysource..
JP Morgan Chase Financial Analysis
JP Morgan Chase Financial Analysis
JPMorgan Chase is among the world’s oldest financial services corporations dating back over 200 years. Today, the company operates as an American multinational company specializing in offering banking and financial services. Its headquarters is located in New York City. As of the end of fiscal 2020, JPMorgan Chase’s total assets were $3.4 trillion and this part of the Dow Jones Industrial average (JPMorgan Chase & Co., 2020). This paper provides an analysis of 3-year key financial ratios, credit quality and presents a 1-year look forward.
Key Ratio Analysis
The first group of financial ratios of interest returns on common equity (ROE), return on tangible common equity (ROTCE) and return on assets. These ratios show JPMorgan Chasse’s profitability from 2018 to 2020. The performance trend of the ratios is summarized in Figure 1 below.
Figure 1: Profitability Ratios
ROE and RPTCE assume an inverted V-shape. ROE is a profitability ratio computed as net income divided by common equity. JPMorgan Chase’s ROE improved from 2019 to 2019 but then deteriorated from 2019 to 2020. Similarly, the company’s ROTCE improved from 2018 to 2019 but then declined from 2019 to 2020. ROA shows how well a company generates profits from its asset base. JPMorgan Chase’s ROA remained fairly stable from 2018 to 2020.
Liquidity ratios evaluate a company’s ability to meets its short-term financial obligations as and when they fall due. It is a financial metric that shows whether a company can cover its current liability using current assets (Schroeder, Clark, & Cathey, 2019). The liquidity ratio of interest is liquidity coverage ratio (LCR). The ratio indicates the proportion of highly liquid assets held by banks and financial institutions to meet short-term financial obligations (McCosker, 2021). JPMorgan Chase’s LCR improved from 2018 to 2019 but then deteriorated from 2019 to 2020. The drop in fiscal 2020 is higher than the growth in fiscal 2019. The trend of the ratio is shown in Figure 2 below.
Figure 2: Liquidity Coverage Ratio
Tier Capital Ratios
The focus of this section is Tier 1 capital for JPMorgan Chase. According to (KoЕЎak, LonДЌarski, & MarinДЌ, 2015), Tier 1 capital shows a financial institution’s capital adequacy, and it comprises equity capital and retained earnings. The ratios of interest are common equity Tier 1 capital ratio, Tier 1 capital ratio, and total capital ratio. Common equity Tier 1 comprises equity held by banks such as cash and stock. Tier 1 capital ratio shows the ratio of a bank’s core tier 1 capital to the total risk-weighted assets. Basel III Accords provides that a bank should have a minimum capital of 8%, of which 6% is tier 1 capital (Koљak et al., 2015). The total capital ratio shows a bank’s Tier 1 capital and Tier 2 capital to the risk-weighted assets. The trend of JP Morgan Chase’s three ratios from 2018 to 2020 is shown in Figure 3 below.
Figure 3: Tier Capital Ratios
As shown in the above figure, JPMorgan Chase’s tier capital ratios improved from 2018 to 2020. This is a favorable trend for the bank and indicates satisfactory performance. Tier 1 capital ratio is above 6%, indicating the bank is Basel III Accord compliant. The ratios show JPMorgan Chase has strong financial health.
Credit Quality Analysis
Credit quality is a measure of a corporation’s creditworthiness. Credit quality influences access to liquidity sources, cost of financing, and willingness of investors to lend to a company. JPMorgan Chase’s credit quality is analyzed using Moody’s, Standard & Poor’s, and Fitch. The company highlights its credit quality and that of its major subsidiary in the 2020 annual report. A summary of the credit quality is shown in Figure 3 below:
Figure 3: Crediting Quality Ratings
Source: PMorgan Chase & Co. (2020)
The Moody’s credit score for JPMorgan chase’s parent company, principal subsidiary bank and non-bank subsidiaries show a stable outlook for both long-term and short-term issuer. The Standard Poor’s analysis reveals the same outlook. Fitch ratings are used to assess JPMorgan Chase’s viability of investments relative to the probability. JPMorgan Chase’s Fitch ratings provide a negative outlook, inferring a possible downgrade in future. All three credit quality agencie
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