Money center banking giant JPMorgan Chase (NYSE:JPM) reported full-year earnings on Friday that finally exceeded the profits it reported in 2006. It is on pace to exceeding 2007 earnings levels in the coming year and completing what has been a difficult five-year period for all major banks in the country. At current share price levels, further upside potential is somewhat limited, but so is downside risk.

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Fourth Quarter Review
Total bank revenues climbed 6% to $26.7 billion. Business units with notable strength include investment banking, which competes with pure-play rivals including Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) and reported a top-line increase of 26% to $6.2 billion as debt underwriting and general advisory work jumped in the double digits. Commercial banking saw a 15% revenue improvement to $1.6 billion while retail financial services and asset management grew in the double digits as well. The credit card group continued to struggle and saw sales fall 18% to $4.2 billion, though the net charge off rate continued to fall and decreased to 7.08%. Rival American Express (NYSE:AXP) has also reported a big drop off in the charge off rate, and reported a rate of 5.1% during its most recent third quarter.

Provisions for credit losses fell sharply from last year's quarter, dropping 66% to $3 billion as bad loans in the financial services, card services and commercial banking continued to fall. Mortgage delinquencies also declined. Overall, net income jumped 47% to $4.8 billion, or $1.12 per diluted share.

Full-Year Recap
Total annual revenues fell 4% to $104.8 billion, but credit loss provisions fell 57% to $16.6 billion and helped push net income up by 48% to $17.4 billion, or $3.96 per diluted share.

The Bottom Line
Fourth-quarter book value came in at just over $43 per share. The share price rise after the favorable financial release has pushed the stock to a slight premium to book value. For the year, return on equity (ROE) reached 10% and returned to double-digit levels last seen in 2007.

It's reasonable to assume that ROE stays around the 10% range for the foreseeable future. This implies earnings of $4.30 per share and places the earnings multiple at about 10. Over the past decade, JPMorgan has been able to grow book value in the high single digits annually, so it's also reasonable to assume that the stock price will grow in this range going forward. Shareholders will also see a return of a dividend payment and could see double-digit total returns over the next few years. Overall, the bank represents a relatively safe way to gain exposure to the financial services industry as it recovers from the credit crisis. Rival Bank of America (NYSE:BAC) has more potential upside potential, but comes with a great deal more of uncertainty. (For related information, take a look at Analyzing A Bank's Financial Statements.)

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