All eyes will be on
JPMorgan Chase & Co.
) 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
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
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
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
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
For instance, it has temporarily suspended its share repurchase
program following the trading debacle. Also, weak financials will
make its valuation
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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
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
) 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
) is scheduled to report on July 16,
Goldman Sachs Group Inc.
) on July 17,
Bank of America Corporation
) on July 18 and
) on July 19.