JPMorgan Finds Small Biz Beautiful - Analyst Blog

JPMorgan Chase & Co. (JPM) continues to make contributions to the economic recovery by lending out to small businesses. In 2010, the banking arm of JPMorgan extended loans of more than $10 billion to U.S. small businesses, the company said on Tuesday. This represents more than a 40% increase in small business loans year to date.

Small business lending has been a topic of intense discussion since the financial crisis. Many of the U.S. banks, which had taken government funding to avert a collapse faced public pressure to help reduce unemployment by providing loans to small businesses.

Rate Cut: A Further Motivation

It is probably not enough to just extend loans. Since small businesses are required to create jobs, JPMorgan initiated a new plan in June. Per this plan, JPMorgan slashed loan rates on small businesses that hire new employees.

JPMorgan lowered the rate by 0.5 percentage points for every new employee appointed in a small business, with a maximum of three employees.
 
Apart from lowering loan rates, JPMorgan also provided discounts to small businesses for opening checking accounts. The company expects these small businesses to take full advantage of the lower interest rates and thereby help reduce unemployment.
 
The new program initiated by JPMorgan is applicable to new lines of credit of up to $250,000. However, its previous customers can avail this facility by increasing their line of credit by $10,000 or more.

Other Lenders in the Arena

Besides JPMorgan, many other companies are also continuing various programs to support small businesses. Bank of America Corp. (BAC) has continued to increase its spending on small and medium-sized and diverse businesses. The company pledged to buy $10 billion of products and services from the small companies over the next half decade, with a 5% increase in spending every year.

Wells Fargo & Company (WFC) has also remained one of the largest providers of small business credit in the U.S. economy in 2010 and continued to lend to credit-worthy customers.

Small Biz Legislation    

President Barack Obama signed the long-anticipated small business stimulus bill, aimed at creating more jobs in the challenged economy, into law in September. The Small Business Jobs Act includes a $30 billion credit to community banks that lend to local businesses, along with $12 billion in tax breaks.

The idea was to pump capital into community banks that provide the lion's share of their lending to small businesses, making more credit available for Main Street businesses.

Another provision of the legislation aims to enhance the flow of capital by providing $1.5 billion in funding to state lending programs that help support loans to small businesses.

However, according to Republicans, the program would again encourage banks to make risky loans. As a result, the legislation might not help create jobs or economic recovery.

Is This a Good Deal?

The sluggish recovery of the economy reflects that lending has slackened over the last few months. However, lending to small businesses primarily to create jobs is probably not the first-line problem with the economy. If businesses have fewer customers as a result of lower consumer spending and shrunken demand, they won't take out loans to expand in the first place.

Recommendation

JPMorgan shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation. Also, considering the company's business model and fundamentals, we have a long-term Neutral recommendation on the stock.

 
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