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JPMorgan Chase & Co. (JPM - Analyst Report) is scheduled to release its fourth-quarter and full-year 2013 results tomorrow, Jan 14, before the opening bell.

In the third quarter, massive legal expenses dampened the banking behemoth’s results, making it report a loss of 17 cents per share. This represented a pause in its strong earnings run for six straight quarters. However, leaving out the primary non-recurring items, it delivered an 11.8% positive earnings surprise thanks to solid performance by its client franchises.

Will JPMorgan be able to return to its earnings story after covering the legal costs this time? Let’s see how things have shaped up for this announcement.

Factors to Influence Q4 Results        

Regulatory and litigation issues spilled over into this quarter and JPMorgan continued to hit headlines for its wrong doings and related settlements. The latest in this regard is the upcoming $2.6 billion settlement of criminal and civil allegations related to the fraud at Bernard Madoff’s Ponzi scheme.

This outflow, which could erode its earnings, brings the total cost of its legal settlements to nearly $30 billion over the past two years. The final impact that the settlement will have on JPMorgan's fourth-quarter earnings depends on the strength of its legal reserves. Also, as legalities seem to have become part of the company, it will have to set aside significant funds as reserves for future settlement costs.      

However, continued cost containment through workforce reduction is expected to support the bottom line. It is on track to reach its target of axing as many as 17,000 jobs, including 13,000–15,000 positions in mortgage banking, by the end of 2014. In Nov 2013, Gordon Smith, JPMorgan's chief executive officer of consumer and community banking said that the bank was all set to reduce 11,000 of the targeted mortgage banking positions by the end of 2013.

Though we don’t expect any significant improvement in interest income due to sluggish loan growth and a persistent low interest rate environment, broad-based strength across product lines should make up for the shortfall.

Moreover, higher trading revenues and an improvement in investment banking on the back of enhanced equity market dynamics should continue to support top-line growth. But lesser mortgage activity in the quarter may work as a dampener.

Similar to the third quarter, this banking giant failed to impress analysts with its level of activities. The concern over the outflow related to Madoff and other settlements forced many analysts to significantly lower their fourth-quarter earnings estimates. The Zacks Consensus Estimate has moved down by 3.8% to $1.25 per share over the last 7 days, as the tendency for a downward estimate revision was more obvious.

Earnings Whispers

Our proven model does not conclusively show that JPMorgan is likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Negative Zacks ESP:  The Earnings ESP for JPMorgan is -4.80%.  This is because the Most Accurate estimate stands at $1.19 while the Zacks Consensus Estimate is higher at $1.25.
 
Zacks Rank: JPMorgan’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.  

Stocks to Consider

Here are a few major bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Fifth Third Bancorp (FITB - Analyst Report) has an earnings ESP of +2.38% and carries a Zacks Rank #2. It is scheduled to report fourth quarter results on Jan 23.

The earnings ESP for M&T Bank Corp. (MTB - Analyst Report) is +3.85% and it carries a Zacks Rank #3. The company is expected to release fourth quarter results on Jan 15.

SunTrust Banks, Inc. (STI - Analyst Report) has an earnings ESP of +1.43% and carries a Zacks Rank #3. It is scheduled to report fourth quarter results on Jan 17.

In the banking sector, JPMorgan, which has exposure in almost all banking businesses, will be kicking off the fourth-quarter earnings season with Wells Fargo & Co. (WFC - Analyst Report). Therefore, the release will be a significant indicator of fundamental performance by the key banking sector.

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