Last Bank Standing
09/30/2008 12:46 pm EST
Stephen Biggar, global director of equity research at Standard & Poor's and analysts Mark Albrecht and Stuart Plesser say JPMorgan Chase will survive the financial turmoil.
When Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) were approved to become bank holding companies, it brought an end to the storied history of the traditional Wall Street investment bank.
Now, Goldman and Morgan Stanley will fall under the regulatory auspices of the Federal Reserve. Not only does their new status give them permanent access to the bank discount window, it will help both expand their deposit bases and retail banking services. It also means the Federal Deposit Insurance Corporation (FDIC) will be their overseer.
How will this move by the investment banks affect existing large diversified banks? At first glance, we believe it is positive for companies such as Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Bank of America (NYSE: BAC), because it validates their business model. Additionally, these companies are further along in their integration of commercial banking with investment banking, [although] one does not have to look further than Citigroup to understand how difficult melding the parts of a disparate institution can be. Years after embracing this business model, Citigroup is still seeking efficiencies and compliance between business units.
Finally, we believe that the decision to anoint investment banks with bank holding status will likely preclude any near-term shotgun marriages between commercial banks and investment banks. This is apt to hurt banks like Wachovia (NYSE: WB), Wells Fargo (NYSE: WFC), and US Bancorp (NYSE: USB) that we think have been slower to embrace this model.
Existing investment banks now have more bargaining chips and aren't likely to let their franchises be sold at less than optimal value, in our view. An interesting aside to all of this is Bank of America's pending acquisition of Merrill Lynch (NYSE: MER).
Though Bank of America's chief executive officer Kenneth Lewis was initially criticized for purchasing Merrill at too dear of a price, that decision may actually be the very thing that moves this acquisition along. We think the goodwill being offered will likely lead to a consummation of the deal, and Merrill will get to partner with a premier US bank.
We dropped analytical coverage of Washington Mutual following federal regulators' seizure of the company on September 25th and the sale of most of the bank's operations to JPMorgan Chase for about $1.9 billion. We previously had a Hold recommendation on Washington Mutual.
We retained our strong Buy opinion on JPMorgan. We think Washington Mutual is a good fit for JPMorgan, giving it exposure to the California market. The deal will likely add $2 billion to $3 billion to annual earnings. We increased our 2009 earnings estimate by 50 cents to $3.79 a share, and our target price by $2.00 to $50, an above-peer 13.2x our 2009 estimate. (It traded at $46 amid Monday's major selloff in stocks-Editor.)