J.P. MORGAN 1/14/94 1/13/94 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr J. P. Morgan 70.38 79-59 12/1 7.80 7.75 9.1 1.90 1.47 JPM J.P. Morgan (JPM) 70 3/8, 1994 $7.75, 1995 $8.50, Market Performer * ANOTHER RECORD IN TRADING REVENUES * FEE INCOME IN 20+% TREND CATEGORIES * RAISING 1994 EST BY $0.30 TO $7.75 INVESTMENT SYNOPSIS: J.P. Morgan's quarterly earnings of $1.92 in the fourth quarter was the lowest on a core basis in 1992, but is probably sustainable in this range as long as trading remains strong. The result was $0.22 better than forecast due to another record in trading, and analysts are notching up their 1994 estimates again, by $0.30 to $7.75, although the innate volatility still leaves the likely range rather broad. Giving them a two-multiple point premium over the money center average would argue for an $85 one-year price target when eyeing analysts' $8.50 1995 estimate as a guide. ROE was 19% in the quarter. With the adoption of fair value accounting on marketable items, book value advanced by $1.2 billion (almost $6/share) to $47.25. This brings the price/book ratio down to 149%, a certainly more appealing level that is in the mid-range of bank stocks. FOURTH QUARTER SYNOPSIS: The trading line rose to another record despite general doubts about the trading environment -- at least in comparison to the strong second and third quarters. This again points to the diversity of Morgan's trading businesses. The emerging market trading side was a substantially higher contributor and offset somewhat lower swaps trading results and a probably less vibrant European portfolio, although succinct detail to support this is not available. The $606MM was triple the year- ago trading revenues, and bested the second quarter record of $520MM. This leads to the relevance of trading in evaluating future earnings, as the formal trading line was nearing 40% of total revenues (excluding some Latin back interest.) And since some of the net interest line is also attributable to trading we continue to believe over half of gross revenues are functionally equivalent to the trading business and an even greater proportion of the bottom line is from the same. The 1994 estimate assumes continued success in the other fee lines, which produced $470MM this quarter, including investment management, corporate finance, credit fees, and operational services. This grouping advanced 22% in 1993, overall, and we are using a 17% forward trajectory. A tug-of-war with trading is still possible, and analysts are using a $450MM quarterly run-rate, which would explain why estimates reflect some near-term plateau in final quarterly results. The quarter contained $107MM in past due interest from Argentina, no substantive equity gains compared to earlier quarters, more than offset with a $120MM special charge for real estate and relocation. The latter reflects a writedown of downtown NYC space that had been intended for renovation and some impact from offshore utilization changes, notably Frankfurt. As said, the fee businesses are still growing. While credit fees were flat, investment mangement was up 23% in the quarter, corporate finance was up 21% and operational services was up 20%. The net interest margin declined, excluding Argentina, to about 1.22% versus 1.39% in the third quarter and the 1.79% average for 1992. Average earning assets sequentially declined, with loans off $518MM, investment securities off $2.6 billion and trading assets off $2.3 billion. The margin decline stemmed from mix as well as rolloff of higher yielding investment securities, which is likely to continue. Net interest is only 26% of core revenues, however. The loss provision was zero, which analysts expect into the foreseeable future. % CHG 4Q93 3Q93 2Q93 1Q93 4Q92 Domestic Loans -7 7879 8000 8602 8711 8486 Overseas Loans -13 16992 17389 18414 19048 19423 Avg Loans & Leases -11 24871 25389 27016 27759 27909 Loans to EA 19.2 18.7 21.4 24.0 26.8 Avg Earning Assets 24 129653 135558 126471 115676 104289 NII Margin -18 1.55 1.39 1.46 1.64 1.73 Net Interest Income (te) 12 507 474 460 469 454 Non-Interest Income 76 1126 1076 1018 956 641 Trading Acct nm 606 464 520 469 200 Corp Fin & Credit Fees 29 215 195 173 173 167 Inv Mgmt & Opr Svcs Fees 23 255 238 233 229 208 Other Revenue nm 50 179 92 85 66 Security Gains nm 32 98 98 95 45 Non-Interest Expense 37 1023 882 866 809 747 Staff 28 538 591 561 531 419 Occup, Tech & Commo 64 328 192 201 182 200 Misc 23 157 99 104 96 128 Net Chargeoffs 0.10 6 25 13 56 50 Net Addition to Reserve nm (6) (25) (13) (56) (40) Pretax Income (te) 68 642 766 710 711 383 Tax Rate - Pro Forma 39 39 39 nm 42 Tax Rate - Reported 36 36 36 35 Net Income 77 392 468 431 295 221 Preferred Dividend 5 4 4 5 5 DIV /Share 13 $0.680 $0.600 $0.600 $0.600 $0.600 Avg Shares 201.6 202.2 200.5 199.1 197.7 Net /Share - Diluted 75 $1.92 $2.29 $2.12 $1.47 $1.10 Common Equity 33 9095 7930 7537 7020 6814 Loan Loss Reserve 1157 1163 1188 1202 1258 Loans & Leases (net disc) -8 24380 24478 27618 26792 26438 NonPerforming Loans 282 296 278 299 536 Assets 30 133888 129285 132532 128821 103197 Reserve to Loans 4.75 4.75 4.30 4.48 4.75 NP Loans to Total Loans 1.16 1.21 1.07 1.12 2.03 Tier 1 Ratio 9.3 9.3 8.9 8.2 8.9 ROA 1.04 1.20 1.18 1.28 0.97 ROE (Common) 19.03 23.92 23.49 24.94 12.37