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4) Group Project:Maximum group number for each group is 4. Power point is required for the presentation. A hard-copy written report needs to be submitted by the due day. a) Bank performance analysis and strategic advising(12 points) b) Written report(4 points) c) Oral presentation(4 points)
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Bank Performance
Analysis
J.P. Morgan Chase & Co.
Rylee Yackle
Shihua Meng
Majed Alqahtani
Finance 425
Thurs 7-945pm
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Table of Contents
Introduction / Purpose_______________________________________________3
Bank History_____________________________________________________3-4
S.W.O.T. Analysis_________________________________________________5-6
Strength_____________________________________________________5
Weakness____________________________________________________5
Opportunity__________________________________________________6
Threats______________________________________________________6
CAMEL Analysis ________________________________________________6-19
Capital Adequacy____________________________________________7-9
Asset Quality_______________________________________________9-10
Management Quality________________________________________11-12
Earnings_________________________________________________12-13
Liquidity Measures_________________________________________13-16
Sensitivity to Market Risk___________________________________16-19
Conclusion_____________________________________________________19-20
References_____________________________________________________21-22
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Introduction / Purpose
Banks can be a complex business to analyze. There are so many factors that go into
running any business and this complexity is just the same for a bank. In this report we focus on
analyzing J.P. Morgan Chase & Co. We will discuss the bank history, the SWOT analysis, and
most importantly the CAMELS rating. This rating is the most common way a bank in analyzed
to date. CAMELS stands for Capital Adequacy, Asset Quality, Management Quality, Earnings,
Liquidity Measures, and lastly Sensitivity to Market Risk.
Bank History
J.P. Morgan Chase and Co. is one of the largest and most known financial institution
today but this did not happen overnight. A lot of hard work and dedication went into making this
institution what it is known as today.
According to J.P. Morgan Chase’s’ website, more than 1,200 previous financial
institutions all have come together through many years and have now formed what we know
today. It all started back in 1799 in New York City. In the early 1790’s there were about 20
chartered banks in the United States and it was considered to be very exclusive to have a bank
charter. A bank charter was very exclusive and competition was not supported between the banks
so banks were required to become incorporated. The first banking institution that came with the
privileges of a charter is The Manhattan Company which was a water company that was allowed
to perform banking needs. This institution was one of J. P. Morgan Chase’s earliest predecessors.
In 1799 New York city made sure to back The Manhattan Company to make sure the city had
clean water.
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Alexander Hamilton and Aaron Burr were two founders of The Manhattan Company.
Alexander Hamilton was a found of the Bank of New York which in the year 1799 was the only
state chartered bank in Manhattan. Mr. Hamilton strongly disliked Mr. Burrs change to the
charter that would allow for The Manhattan Company to use its capital stock. This change
allowed for easier change in banking operations and also leads the direction for the creation of a
new bank. This change was eventually approved and that led Hamilton to leave any and all
association with the water company. In 1804 Aaron Burr shoots and kills Alexander Hamilton.
Focusing on Chase, J.P. Morgan & Co. was founded in 1871 as Drexel, Morgan & Co. by
J. Pierpont Morgan and Philadelphia banker Anthony Drexel. This bank was primarily used for
foreign currency and European investing. This bank eventually got involved in railroads and
industrial mergers and thus leading the institution to be the most powerful investment bank. In
1898 branch banking was allowed in New York city. This new rule lead to dozens of branches
opening and helping out retail customers. The Federal Reserve was founded in 1913 and thus
became the primary bank which was previously held by J. P. Morgan. From that point forward J.
P. Morgan eventually acquired many other banks and most recently acquired Washington
Mutual. Some of the previous predecessors to J.P. Morgan Chase & Co. are as follows:
J.P. Morgan & Co.
The Chase Manhattan Bank
Bank One
Manufacturers Hanover Trust Co
Chemical Bank
The First National Bank of Chicago
National Bank of Detroit
The Bear Stearns Companies Inc
Robert Fleming Holdings
Cazenove Group
Washington Mutual
Each of these institutions plays a huge part in the financial growth in the U.S.
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S.W.O.T. Analysis
The S.W.O.T. analysis is used to identify the internal strengths, weaknesses, as well as,
external opportunities and threats. Many businesses will perform a SWOT analysis to create a
good strategy to follow. This analysis can be used on either existing business or new ones
coming into the market.
Strengths and weaknesses could include such things like reputation, patents, and
locations. These can always change over time but it is not easy to change a businesses strength or
weakness. It does take a very long time and work. Some examples of external opportunities or
threats include suppliers, competitors and even prices. There will always be competition
threatening a business.
Strength
● Customer Service Experience
● Multiple Services Offered
○ Corporate & Investment
Banking
○ Consumer & Community
Banking
○ Asset Management
○ Commercial Banking &
Corporate Entity
● Strong Brand Name
○ Fortune 500 Company
● International Locations
○ Latin America, Europe, Asia,
London, Middle East, and
many more
● Technology
○ ATM technology / upgrades
○ Online Banking
○ Mobile APP
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Weakness
● Weakening Asset Quality
○ Decreasing Over the Years
● Increasing Expense
○ Non-Interest Expense
Totaled 72% of Total
Revenue
● Dependency of Revenue in
North America
○ Over 65% of Revenue is
Generated in N. America
● Affected by Ever Changing
Market Conditions
Opportunities
● Technology
○ Though Chase is well
developed in technology, there
is always room for
improvement.
● Commercial Banking
○ Chase does not really offer
Commercial Loans
● Asset Management
○ Globally this is growing and
therefore opens up doors for
Chase
○ Deposits / Investments
Threats
● Government
○ Constantly changing
regulations can increase
compliance regulations
● Financial Crisis
○ This can happen and then can
negatively affect the bank
● Cyber Security
○ There are so many online
hackers that Chase has to
always maintain perfect
security.
● Other Banks
○ Competition from other banks
i.e. Wells Fargo
CAMELS Analysis
The CAMELS rating is used internationally to rate banks based off of six different
standards. Out of a scale rating of one to five, a one is considered the best score and a five is
considered the worst score for a bank to receive. If the bank gets an overall average score of two
or higher then that bank is considered to be that of higher quality. Each sub category is given a
rating as well. This rating is on a scale of one to five as well where one is the highest rating and
five is the lowest rating.
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Example –
(Source: Federal Reserve Bank of St. Louis, www.stlouisfed.org)
Capital Adequacy
Capital adequacy measures a banks and investments firms ability to maintain enough
capital to cover any risks the institution might undertake. It is used to measure the financial
stability, the financial strength and maintain any and all obligations the institution might have to
account holders. A financial institution needs to be able to identify and manage these risks while
also continuing to make a profit. Capital Adequacy is best measured using the Capital Adequacy
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Ratio (CAR). Presently, the acceptable minimum ratio is set at 8%. The ratio is calculated by
taking the sum of the banks tier one capital plus the tier two capital and then dividing this by the
risk weighted assets.
(Source: UBPR of Chase Bank USA, National Association)
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This graph above from the Chase bank UBPR report shows the most recent tier one and
tier two assets as well as the total risk weighted assets. These numbers can be used to calculate
the capital adequacy ratio and then compare the years.
In September 2018 the CAR is equal to = 141,459,000 + 20,894,000 / 1,162,178,440 =
0.139 or 13.9%. In September 2017 the same ratio is equal to = 140,021,000 + 22,702,000 /
1,173,292,940 = 0.138 or 13.8%. The minimum capital adequacy that a bank needs to maintain is
a 8% and based on these numbers above Chase has increased their capital ratio by 0.1 % and has
kept the ratio well above the 8% minimum marker. This means that the bank is maintaining
enough capital to handle any risk. This also shows that Chase is stable and has great financial
strength.
CAMELS Rating​ : 1 / 5 – There has been an increase in the capital adequacy from the previous
years.
Asset Quality
Asset Quality is defined as a review or evaluation of the credit risk that a bank has and is
associated with a certain asset. Most of the assets associated with credit risk are loans, or
investments. When it comes to asset quality, managers are most concerned with the quality of
their loans because loans generate profit. Some factors that go into analyzing asset quality
include rules and regulations that banks put into effect to measure credit risk and with this have
created a scale to use as measurement. A one rating will show a good standing with very little
credit risk while on the other spectrum a five means the worse off. If asset quality increases this
means the bank can take on more liquidity, greater risk capacity and a less cost of funds.
When evaluating asset quality there are some key things to consider –
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● Issues of assets
● Late or rescheduled payments / loans
● Capacity to gather issue loans
● Investment improvements
● Credit loss reserves
● Loan volume
J.P. Morgan Chase has issued commercial loans, individual loans, agricultural loans as
well as many other types of loans. The total net for these loans and leases in December 2017 that
number was $105 million and in September 2018 was $99.4 million. This is a 5.33% decrease in
the overall net loans and leases. Chase keeps it a little more simple and does not have any real
estate owned or any real estate loans. Chase also has $15.8 million dollars worth of investments
in December 2017 and $8.6 million in September 2018. This is a another decrease of 45.57% in
the investment category. Total assets for the bank is $143 million in December 2017 and $131
million in September 2018 which leads to a decrease of 8.39%. With all theses numbers, Chase
has a overall decreasing asset quality.
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This graph shows a visual representation of the decrease over the year for each category​.
CAMELS Rating: ​2 / 5 – This has decreased from the previous year but not dramatically to
become a concern.
Management Quality
Supervising a banking institution is a critical operation. The managers of a bank need to
undertake a number of functions to ensure efficiency in their organization. They have to meet the
ever-increasing demand of all the factors associated with their institution. As per CAMELS,
management quality is a tool that helps to identify the capability of a banking institution to
conduct their operations in an effective manner. With the help of this manager of Chase Bank
will be able to check the efficiency of their operations. This can further help the managers of
respective institution to evaluate the market conditions and to frame decisions regarding future
achievements. Management quality of a banking institution can be determined with the help of
various factor including revenues, consumer satisfaction level, assets and so on.
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(Source:An Outstanding Franchise – Annual Report 2014, 2014)
The above graph is showing that the level of consumer satisfaction is increasing
tremendously of the Chase bank in comparison to any other bank. The blue line in the graph is
depicting the level of consumer satisfied with the services of the respective institution. Looking
at the graph, it can be said that the management quality of the concerned organization is
increasing day by day because of which it is able to satisfy its customers. The graph is depicting
the consumer satisfaction up to 2014 but still in 2018 this criteria is showing the same progress.
With the help of this graph, it can be said that the managers of the concerned institution are
compatible to manage the tasks of the association and are able to generate the revenues of the
organization.
CAMELS Rating:​1/ 5 – The management quality is desirable both for customers and the bank
itself.
Earnings
The total earning or total revenues is also a factor that affects the efficiency of every
banking institution. As per CAMELS, earning is a factor that helps in identifying the cumulative
earning or revenues a banking institution is able to collect with all its operational activities. With
the help of this tool, the financial position of a company can be determined. Strong financial
position indicates that the company is able to satisfy all its customers and is fulfilling all its aims
and objectives. Whereas lack of financial resources indicates that the company is losing its hold
over the market.
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(Source: Abaterusso, 2018)
As per the image, it can be identified that the revenues of the respective institution are
rising continuously till Q2 of 2017. But in Q3 of 2017, the banks have to go through a slight
decrease in their revenues. This slight reduction indicates that the bank managers need to
undertake activities which can help them to improvise their functioning. Otherwise, the banks
will loss hold over the market. It is essential for managers to increase their efficiency and build
connections with new consumers. This will help them to increase sales of the organization and
further help in generating more revenues.
CAMELS Rating:​ 1/ 5 – The overall trend of earnings is a gradual increase and the amount of
high.
Liquidity Measures
Liquidity refers to the ability of commercial banks to meet the demand of cash
withdrawal, payment of maturing debts and borrowers’ normal loan requirements. When a bank
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can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a
reasonable cost, we can say its liquidity is adequate.
Loan-To-Deposit Ratio From 2012 to 2017
(in millions)
2012
2013
2014
2015
2016
2017
733,796
738,418
757,336
837,299
894,765
930,697
Deposits
1,193,593
1,287,765
1,363,427
1,279,715
1,375,176 1,443,982
Loan-To-Deposit
Ratio
61.478%
57.341%
55.547%
65.429%
65.065%
Loans
64.454%
(Source: annual report of JPMorgan Chase & Co.)
The table above summarizes the period-end loan, deposit balances and loan-to-deposit
ratio for the years ended December 31 of 2012 to 2017. Chase has increased annually its loans
from 733,736 millions in 2012 to 930,697 millions in 2017. Deposits also have grown
continuously except 2015(83,712 less than 2014). A combination of prudence and regulatory
requirements suggests that for a traditional bank, the LDR should be around 80-90%. But to
Chase, the ratio seems to be inversely proportional to the degree of diversification in the business
model. In 2012, the loan-to-deposit ratio of Chase is 61.478%, but the ratio dropped significantly
to 57.341% in 2013 and then 55.547% in 2014. Over the past three years, Chase maintains a
stable proportion between loans and deposits, around 65%. These are all due to deposits growing
at a slower rate than loans in chase in recent years. And referring to LDR, Liquidity is relatively
adequate in Chase.
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(Source: UBPR of Chase Bank USA, National Association)
As shown in the graphs above, we use the data of Chase, compared to the average data of
banks in peer group(201 credit card specialty banks having assets greater than $ 3 billion). The
Non-Core Funding Dependency Ratio (NCFD) measures the contingency liquidity. In Chase,
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short-term investments is much less than its short-term borrowings, which reflects a limited
capacity to acquire additional assets and liabilities. The trend of NCFD in Chase and its peer
group are similar, but figures in Chase are larger, with approximately 20% difference. Loans and
leases are often among the most illiquid assets a bank can hold. The ratio in Chase is 2.96%
higher than its peer group in 2003, but from then, despite high ratio, it is still relatively lower
than other banks a lot. Consequently, the bank has a high liquidity risk and is heavily dependent
on non-core deposits, but its assets are highly liquid.
Credit Deposit Ratio From 2012 to 2017
(in millions)
Noninterest-Bearing Cash and
Due From Banks
Total Assets
Credit deposit ratio
2015
2016
2017
2018
1,015,577
2,529,176
3,709,019
3,798,800
149,425,754
0.68%
136,183,685 143,800,804 131,312,331
1.86%
2.58%
2.89%
(Source: UBPR of Chase Bank USA, National Association)
From the latest data reported in FFIEC on September 30, 2.89% of the assets of Chase is
noninterest-bearing cash and due from banks. Meanwhile, the credit deposit ratio presents a
growing tendency year by year. A high ratio shows that there is more amounts of liquid cash
with Chase to met its clients cash withdrawals. All in all, Chase maintains a degree of liquidity
which is above the average level in the U.S banking industry.
CAMELS Rating:​ 1/ 5 – It gains relatively high liquidity among the peer group.
Sensitivity to Market Risk
Market risk is the risk associated with the effect of changes in market factors, such as
interest and foreign exchange rates, equity and commodity prices, credit spreads or implied
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volatilities, on the value of assets and liabilities held for both the short and long term. JPMorgan
Chase utilizes VaR, a statistical risk measure, to estimate the potential loss from adverse market
moves in a normal market environment.The Firm has a single VaR framework used as a basis for
calculating Risk Management VaR and Regulatory VaR. The table below shows the results of
the Firm’s Risk Management VaR measure using a 95% confidence level.
Total VaR
As of for the year ended December 31,
(in millions)
2016
2017
Avg.
Min
Max
Avg.
Min
Max
Fixed income
$45
$33
$65
$28
$20
$40
Foreign exchange
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7
27
10
4
20
Equities
13
5
32
12
8
19
Commodities and other
9
7
11
7
4
10
(36)
NM
NM
(30)
NM
NM
CIB trading VaR
43
28
79
27
14
38
Credit portfolio VaR
12
10
16
7
3
12
(10)
NM
NM
(6)
NM
NM
CIB VaR
45
32
81
28
17
39
CCB VaR
3
1
6
2
1
4
Corporate VaR
6
3
13
4
1
16
AWM VaR
2

4



(3)
NM
NM
(1)
NM
NM
8
4
16
5
2
16
CIB trading VaR by risk type
Diversification benefit to CIB trading
VaR
Diversification benefit to CIB VaR
Diversification benefit to other VaR
Other VaR
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Diversification benefit to CIB and other
VaR
(8)
NM
NM
(4)
NM
NM
Total VaR
$45
$33
$78
$29
$17
$42
(Source: annual report of JPMorgan Chase & Co.)
Compared with 2016, the average VaR of Chase is $16 million less in 2017. The
reduction is a result of refinements made to VaR models for certain asset-backed products,
changes made to the scope of positions included in VaR in the third quarter of 2016, and lower
volatility in the one-year historical look-back period.In addition, Credit Portfolio VaR declined
by $5 million reflecting the sale of select positions and lower volatility in the one-year historical
look-back period.The following chart compares actual daily market risk-related gains and losses
with the firm’s risk management VaR for the year ended December 31, 2017 (1-day, 95%
Confidence level). The chart below shows that for the year ended December 31, 2017 the Firm
observed 15 VaR back-testing exceptions and posted gains on 145 of the 258 days.
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The VaR and sensitivity measures illustrate th …
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