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All eyes will be on JPMorgan Chase & Co.’s (
- Analyst Report
second quarter earnings release this Friday, July 13 as the company is expected to provide an update on its recent multibillion dollar trading loss due to an imprudent hedging strategy. Much of the debate now centers on whether the banking giant will be able to keep its bottom line steady despite the huge loss.
Analysts are skeptical about the aftermath of the trading fiasco, and remain pessimistic on their estimates. The Zacks Consensus Estimate for the quarter is 78 cents per share, representing a year-over-year slump of about 38%.
Though the company had returned to its form with solid first quarter results after profit declines for two straight quarters, it is again expected to disappoint with its upcoming numbers. The marked recovery of the bond and equity markets and consequent revenue growth would have helped the banking behemoth report more ore less as usual had it not incurred the trading loss.
After reviewing an internal report related to JPMorgan’s hedging strategy, on June 28, the New York Times reported that the company’s trading losses could swell up to $9 billion (worst-case scenario). This figure is almost triple the amount expected by CEO Jamie Dimon when he made the announcement of the trading loss in early May.
JPMorgan is not leaving any stone unturned to address the fiasco. It has offloaded the majority of its derivative positions that were the culprits of its trading loss. It has also temporarily suspended its $15 billion share repurchase program and decided to remove the private equity-like operations – the special investments group – from its controversial chief investment office (CIO). We expect the company to reveal the extent to which it has progressed in addressing the issue in its earnings release.
On the fundamental side, JPMorgan has been fighting with poor capital market revenues, low liquidity and a tough regulatory environment, which might mar its results to some extent. However, reduction in reserves for future losses, gradually improving retail banking performance, and steady credit trends in its credit card business are expected to be on the positive side.
Previous Quarter Performance
JPMorgan’s first quarter earnings per share of $1.31 surpassed the Zacks Consensus Estimate by 12%. Earnings also jumped 2% from $1.28 earned in the prior-year quarter. The bond and equity market recovery and consequent revenue growth primarily helped JPMorgan to bounce back.
Earnings per share for the first quarter included certain significant nonrecurring items, such as an after-tax benefit from reduced loan loss reserves of 28 cents per share, after-tax benefit from the Washington Mutual bankruptcy settlement of 17 cents, after-tax expense for additional litigation reserves of 39 cents and after-tax loss from debit valuation adjustment (DVA) in the Investment Bank of 14 cents. Excluding these items, JPMorgan’s earnings came in at $1.39 per share.
Results for the quarter were primarily benefited by improved revenue and slowdown in provision for credit losses, which more than offset higher non-interest expense. Almost all the sectors except Corporate/Private Equity performed well to result in such impressive earnings.
Managed net revenue of $27.4 billion was up 6% from the year-ago quarter. The figure also compared favorably with the Zacks Consensus Estimate of $24.4 billion.
Earnings Estimate Revisions - Overview
Ahead of the earnings release, the Zacks Consensus Estimate for the second quarter is substantially down. A significant downward trend in estimate revisions is also apparent, making the weakness in the stock more obvious.
We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should stay away from this stock.
Agreement of Estimate Revisions
The estimate revision trend confirms that the majority of analysts are in agreement about weak second quarter earnings at JPMorgan. Of the total 22 estimates, 12 have been revised downward, while only 3 moved in the opposite direction over the last 30 days.
Also, for full-year 2012, out of 24 estimates, there were 10 downward and 3 upward revisions over the last 30 days.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the second quarter headed south by 11 cents or 12% over the last 30 days. For full-year 2012, the estimate decreased only 3 cents or about 1% to $4.30 per share over the same timeframe.
JPMorgan’s performance has been almost stable over the trailing four quarters with respect to earnings surprises. The company has delivered positive earnings surprises in three of the trailing four quarters (with a double-digit beat during the period), producing an average positive earnings surprise of roughly 6%.
Is JPMorgan Still Attractive?
The estimate revision trend indicates that fresh short-term investment in this stock will not be a good decision. Also, despite its steady dividend-yielding nature, one should not consider this a value stock anymore as the company’s first priority will be to address its trading loss by hook or by crook. So, it may divert its attention from enhancing shareholder value at least in the near term.
For instance, it has temporarily suspended its share repurchase program following the trading debacle. Also, weak financials will make its valuation expensive.
However, an income-seeking investor with the appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul as it pays an impressive quarterly dividend of 30 cents that yields 3.50%.
Also, from the risk perspective, as JPMorgan cleared the most difficult stress test, it is for sure that the company will be able to withstand another financial crisis.
Despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the final quarter of 2009. Though the provision continued to reflect elevated losses in the mortgage and home equity portfolios, we are impressed to see a modest improvement in delinquency trends and net charge-offs. We expect credit quality to continue improving, thereby providing more room for bottom-line improvement.
Though there are concerns related to the future of its recent trading loss and exposure to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan’s results in the upcoming quarters with continued recovery in the capital markets.
Yet, net interest margin (NIM) continues to remain under pressure, affecting the traditional banking businesses. Also, with the thrust of new banking regulations, there will be pressure on fees, and loan growth could remain feeble.
Going by estimate revision trends and the magnitude of such revisions, there is admittedly a downward pressure, though slight, on the shares over the near term.
JPMorgan shares currently retain a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the company’s business model and fundamentals, we still have a long-term Neutral recommendation on the stock.
As JPMorgan is a banking giant with exposure in almost all banking businesses and one of the first two important bankers to kick start second quarter results, the release is going to be a significant indicator of performance in the key banking sector. Wells Fargo & Company ( WFC - Analyst Report ) has advanced its earnings release date since the last quarter by about a week and will report on the same day with JPMorgan.
Close on the heels of JPMorgan and Wells Fargo, the other major banks, namely Citigroup Inc. ( C - Analyst Report ) is scheduled to report on July 16, Goldman Sachs Group Inc. ( GS - Analyst Report ) on July 17, Bank of America Corporation ( BAC - Analyst Report ) on July 18 and Morgan Stanley ( MS - Analyst Report ) on July 19.
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