Despite the Banking Crisis Storm, JPMorgan Remains a Haven

It is once again banks that are dominating the headlines this week after Silicon Valley Bank ceased operations in the wake of its bankruptcy last week. That includes the nation's largest bank, JPMorgan Chase JPM -1.08% which has a market capitalization of over $1 trillion, and at least one analyst believes that this presents a buying opportunity.

‍

Investors are likely to hear this argument again and again, and with good reason.

‍

According to Wells Fargo (WFC -5.16%) analyst Mike Mayo, JPMorgan (ticker: JPM)'s stock has been upgraded from Equal Weight to Overweight on Monday, and his target price has been raised from $148 to $155 for the stock. “It is because of its 'fortress balance sheet' that JPMorgan is battle-tested to deal with downturns.”

‍

Following the financial crisis of 2008-2009, several new requirements were implemented by the government in regard to the big banks in terms of their capital positions, in part as a precaution against them falling victim to another financial crisis in the future. There were some shareholders who grumbled about the more stringent rules, particularly since they required banks to keep more cash on hand, rather than buying back stock or increasing the dividend payouts they offered their shareholders.

‍

Nevertheless, the changes resulting from the recent regulatory overhaul bring some reassurance to investors in the big banks as a whole, thanks to those changes.

‍

Mayo, however, points out that JPMorgan has other advantages over its competitors. “In each of its business lines, JPMorgan has grown meaningful share of the market...and has previously excelled in times like these when other financial institutions have issues when JPMorgan has been able to maintain its market share. During these less certain times, JPMorgan exemplifies our theme of 'Goliath is Winning', and it illustrates what we mean by that.”

‍

An industry's biggest players consolidating their market share during a crisis has been a scenario that has been played out a number of times in the past. Some examples of this could be the gains achieved by McDonald's MCD +1.56 % (MCD) during the 2008-2009 financial crisis, or the gains made by big retailers like Target (TGT) and Costco Wholesale COST +0.78 % (COST) during the height of the pandemic. For JPMorgan, the gains made in the current period are a continuation of the gains made in the past few years.

‍

Moreover, it is difficult to imagine a scenario where JPMorgan would run into serious financial difficulties without being bailed out by the government given that it is the nation's largest bank. The concept of being too big to fail is exemplified by no other bank. Thus, it comes as no surprise that nearly two-thirds of analysts rate the stock as a Buy or equivalent, with an average price target of $158.18, more than 18% above Friday's closing price.

‍

It should also go without saying that JPMorgan, as well as the vast majority of other banks, has a much more diversified portfolio than Silicon Valley Bank, owned by SVB Financial SIVB 0.00%  (SIVB). The majority of Silicon Valley Bank's deposits are held by start-up businesses in the tech sector; however, most other lenders serve a broader range of customers than Silicon Valley Bank. As a result, firms have a greater breadth of income-producing assets in their portfolios, though it is likely that the value of fixed income assets in the portfolios of all firms will have been negatively affected by the rise in interest rates.

‍

There is a difference between believing that JPMorgan can weather any financial storm and saying that its stock is a good buy at the moment. Despite the fact that the sector's current concerns are eventually over, banks, like many other companies, tend to see their stock prices sway when the economy goes into a downturn. This could be another hurdle for the shares if, as seems to be expected, a recession is to arrive as soon as possible.

‍

The truth is, however, that for investors looking to gain exposure to the banking sector, it is hard to think of a more secure investment option than JPMorgan, due to its scale and strengths. Despite David's victory over Goliath being a surprise to everyone, it signifies the fact that Goliath typically wins most of the time.