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Will JPMorgan (JPM) Disappoint This Earnings Season?

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JPMorgan Chase & Co. (JPM - Free Report) will issue its third-quarter 2013 results tomorrow, Oct 11, before the market opens.

In the last quarter, it delivered a 10.3% positive earnings surprise on the back of lower loan loss reserves and improved top line. This represented the sixth straight quarter of positive earnings surprise. Will JPMorgan be able to keep the earnings streak alive? Let’s see how things have shaped up for this announcement.

Factors to Influence 3Q Results        

The banking giant is negotiating a potentially massive settlement of criminal and civil charges with the Department of Justice, regulators and other authorities over allegations involving bad mortgages. The potential cost of the settlement is about $11 billion, the largest bank fine in U.S. history.  The extent of impact that the settlement will have on JPMorgan's third-quarter earnings depends on its legal reserves in the quarter.  

However, continued cost containment through workforce reduction is expected to support the bottom line. It has plans to axe as many as 17,000 jobs, including 13,000–15,000 positions in mortgage banking, by the end of 2014.

Though we don’t expect any significant improvement in interest income due to sluggish loan growth and a persistent low interest rate environment, an uptick in mortgage activity should make up the shortfall.

Moreover, higher trading revenues and steadily improving investment banking should continue to support top-line growth.

Unlike the second quarter, this banking giant failed to impress analysts with its level of activities. In fact, the concern over the potential settlement forced many analysts to significantly lower their third-quarter earnings estimates. The Zacks Consensus Estimate for the third quarter has moved down by a couple of cents to $1.29 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 third 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 -2.33%.  This is because the Most Accurate estimate stands at $1.26 while the Zacks Consensus Estimate is higher at $1.29.
Zacks Rank: JPMorgan’s Zacks Rank #3 (Hold) however increases the predictive power of ESP. That said we also need to have a positive ESP to be confident of an earnings surprise call.  

Stocks to Consider

Here are a couple of stocks 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 - Free Report) has an earnings ESP of +4.55% and carries a Zacks Rank #3. It is scheduled to report third quarter results on Oct 17.

The earnings ESP for Huntington Bancshares Inc. (HBAN - Free Report) is +17.65% and it carries a Zacks Rank #3. The company is scheduled to release third quarter results on Oct 17.

In the banking sector, JPMorgan, which has exposure in almost all banking businesses, will kick off the third-quarter earnings season with Wells Fargo & Company (WFC - Free Report) . Therefore, the release will be a significant indicator of performance in the key banking sector.

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