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JPMorgan Chase & Co. (JPM, Financial) and The Goldman Sachs Group Inc. (GS, Financial) are two prestigious banks in the U.S. Both are often seen as rivals in the world of investment banking, but do have major differences in terms of business model focus and scale. For example, JPMorgan has an enormous $374.46 billion market capitalization, which is over 3.3 times Goldman Sachs' $107.40 billion market cap. In addition, Goldman has a 3.11% forward dividend yield, while JPMorgan pays a slightly higher 3.13% dividend.
These larger banks have also benefited from the mistrust that has formed around mid-tier banks after the Silicon Valley Bank (SIVBQ, Financial) crisis. Therefore, I expect record inflows to show up in first-quarter 2023 results.
About JPMorgan Chase
JPMorgan Chase (JPM, Financial) is one of the largest banks in the U.S. with approximately $3.31 trillion in assets under management. The company has four main business segments, which are Consumer and Community Banking, Corporate and Investment Banking, Asset & Wealth Management and Commercial Banking.
Solid financials
In January, JPMorgan reported solid financial results for the fourth quarter of 2022. Revenue of $34.5 billion increased by 5.64% year over year and beat analysts' estimates by $320.96 million.
The company's net interest income (excluding the Markets segment) was a solid $20 billion and increased by 72% year over year due to higher interest rates.
Its net interest income margin also climbed 48% year over year. From the chart below you can see JPMorgan has consistently reported a higher NII margin than Goldman Sachs, which is a positive.
Its noninterest income did decline by 8% year over year to $15.3 billion, which was driven by a lower investment banking segment due to a tepid initial public offering and trading market. A positive was its Markets revenue increased by 7% year over year as, despite the slowdown in equity trading, fixed income was still strong. Loan originations also increased by 14% year over year due to increased usage of revolver setups by companies as they aim to secure capital.
Its overall noninterest expense expanded by 6% year over year to $19 billion. A positive is this was mainly due to the company increasing its employee compensation and investments into technology and marketing. Overall, I do not deem these to be negative expenses in the long term.
JPMorgan maintained a strong return on tangible equity of 20%, which was solid and higher than banks such as Citigroup Inc. (C, Financial), which reported a ROTE equal to 10% in 2022 (which is also good).
In order to help assess the safety of a bank from a liquidity standpoint, a Common Equity Tier 1 capital requirement (CET1) of between 6% and 8% must be achieved. In this case, JPMorgan has more than double the low end of this range with 13% reported. Thus, the company is poised to weather any storm.
Valuation
In order to value JPMorgan, we can use a simple price-book ratio of 1.41, which is slightly cheaper than its five-year average.
The GF Value Line indicates a fair value of $144.54 per share, which means the stock is modestly undervalued at the time of writing.
About Goldman Sachs
Goldman Sachs (GS, Financial) is another major U.S. bank with approximately $2.55 trillion in assets under management. Its segments include Global Banking & Markets, Asset & Wealth Management and Platform Solutions.
Mixed financials
The company reported mixed financial results for the fourth quarter of 2022 in January. Its revenue of $10.5 billion missed analysts' expectations by $288.9 million and declined by nearly 17% year over year.
Goldman's Global Banking & Markets segment is its largest reporting business, contributing $32.49 billion or 68.58% of its $47.37 billion in total revenue for 2022. The segment reported a 12% decline year over year, driven by the macroeconomic environment.
The market conditions also impacted the company's investment banking business. Fees derived from investment banking declined by an eye-watering 48% year over year to $7.36 billion. This was driven by lower equity and debt underwriting demand, which was an industry-wide phenomenon.
Its Asset & Wealth management division generated $3.56 billion in the fourth quarter, declining 27% year over year on the back of a lower number of equity investments and net markdowns on assets.
A positive for Goldman is its private banking and lending net revenue was significantly higher, driven by higher deposits and loan balance. The company plans to invest more into its consumer segment to grow.
The Platform Solutions business is expected to be a key part of this growth strategy. It generated revenue of $513 million in the fourth quarter, which increased by a blistering 171% year over year. This was driven by its digital consumer platforms such as Marcus and higher credit card balances.
In the short term, the company has put a pause on new loans offered through the Marcus platform and has delayed the launch of a new checking product for wealth management clients. It is also focusing on bolstering its deposit business, increasing its card partners and its home loan platform GreenSky, which was acquired in 2021.
Goldman Sachs' asset management team also has plans to invest $1.1 billion over the next four years in a series of biomethane plants, which could help diversify its business model further.
Valuation
In order to value Goldman Sachs, I have calculated a price-book ratio of 1.01, which is close to its five-year average and trading slightly cheaper than JPMorgan.
The GF Value Line also indicates a fair value of $300.94 per share and thus, the stock is fairly valued at the time of writing.
Final thoughts
Both JPMorgan and Goldman Sachs are giant banks with extremely strong brands.
Goldman experienced a little reputational damage over the "botched" capital raise, which it aimed to do for Silicon Valley bank. However, overall I believe both banks will benefit from a consolidation of capital into larger organizations. Goldman is trading slightly cheaper based on the price-book ratio, but JPMorgan has the benefits of scale.
I think JPMorgan offers the best opportunities for investors currently as its business model is more diversified with a strong consumer banking segment that benefits from the rising interest rate environment.
