JPMorgan Chase & Co.
) is set to roll out its third quarter earnings tomorrow morning,
Friday, October 12. So, what's in store for the banking giant?
While last quarter's solid earnings surprise -- despite its 'London
Whale' trading fiasco -- was sufficient to win analysts'
confidence, a marked improvement in capital market activity and
healthy mortgage business during the third quarter drove the
estimates upward. The Zacks Consensus Estimate for the quarter is
$1.21 per share, representing year-over-year growth of about 19%.
We believe the company is well poised to meet this expectation as
the impact of last quarter's trading debacle has almost faded by
now. In fact, the chance of reporting better-than-expected earnings
is very high. If JPMorgan beats the Zacks Consensus Estimate this
quarter, it will mark the company's third consecutive earnings
As a caveat, the recovery of the bond and equity market
notwithstanding, the revenue is not expected to rebound
significantly with fundamental pressures like low interest rate and
sluggish loan demand still very prevalent. However, the offsetting
factors could be favorable loan loss reserve and lower loss related
to accounting adjustments (primarily the debit valuation
Moreover, improving macroeconomic elements - such as a recovering
housing market, modest inflationary pressure and lower unemployment
- are expected to bring revenue stability for JPMorgan and the
other major U.S. banks. The Zacks Consensus Estimate for revenue is
$24.6 billion, up 3% over the year-ago quarter.
On the fundamental side, JPMorgan is trying to dodge the pressure
on net interest margin, low liquidity and a stringent regulatory
environment, which might mar its results to some extent. However,
gradually improving retail banking performance and steady credit
trends in its credit card business are expected to provide some
Previous Quarter Performance
JPMorgan's second quarter earnings per share of $1.21 surpassed the
Zacks Consensus Estimate by 55%. However, earnings decreased 5%
from $1.27 earned in the prior-year quarter.
Due to an impudent hedging strategy, the company incurred a
derivative trading loss of $4.4 billion (before taxes) in its chief
investment office (CIO) for the period. However, a marked recovery
of the bond and equity markets, and the consequent strong
performances by its business segments, helped JPMorgan overcome its
difficulties to a large extent.
Apart from the CIO trading loss, which impacted the results by 69
cents per share (after tax), JPMorgan's earnings per share for the
second quarter included certain significant nonrecurring items such
as a benefit of 16 cents from gains in the CIO's investment
securities portfolio, a benefit from reduced loan loss reserves of
33 cents, a gain of 12 cents from debit valuation adjustment (DVA)
in the Investment Bank and a gain of 9 cents related to loss
recovery at Bear Stearns. Excluding these items, JPMorgan's
earnings came in at $1.20 per share.
Results for the reported quarter primarily benefited from lower
non-interest expenses and a substantial slowdown in provision for
credit losses, partially offset by lower revenue. Almost all the
segments except Corporate/Private Equity performed well, leading to
such impressive earnings during the controversial quarter.
Managed net revenue of $22.9 billion in the second quarter was down
16% from the year-ago quarter. The figure, however, compares
favorably with the Zacks Consensus Estimate of $22.7 billion.
Earnings Estimate Revisions - Overview
Ahead of the earnings release, the Zacks Consensus Estimate for the
third quarter has moved up. A significant upward trend in estimate
revisions is also palpable, making the strength in the stock more
We will now discuss the details of earnings estimate revisions to
substantiate why both short-term and long-term investors should add
this stock to their portfolio.
Agreement of Estimate Revisions
The estimate revision trend confirms that the majority of analysts
are in agreement about a strong third quarter earnings at JPMorgan.
Of the total 24 estimates for the quarter, 11 have been revised
upward, while only 2 moved in the opposite direction over the last
Also, for full-year 2012, out of 26 estimates, there were 11 upward
and 3 downward revisions over the same time frame.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the third quarter headed north by
5 cents or 4% over the last 30 days. For full-year 2012, the
estimate increased 7 cents or about 1% to $4.74 per share over the
same time frame.
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 and missed in one, producing an average earnings surprise
of roughly 19%.
How Attractive is JPMorgan Now?
The estimate revision trend indicates that fresh short-term
investment in this stock will be a good decision from a price
appreciation perspective. However, it may not be a good pick for
investors looking for steady income in the medium term as the
company's first priority will be to address its trading loss and
the impacts of various regulatory and legal investigations related
to its business operations.
Thus, it may divert its attention from enhancing shareholder
value at least in the near-to- mid term. For instance, it has
temporarily suspended its share repurchase program following the
'London Whale' debacle.
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However, an income-seeking investor with an appetite to absorb
risks ensuing from 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 2.87%
Also, from a 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, providing more room
for bottom-line improvement.
Though there are concerns related to the impact of legal issues and
its 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 an upward pressure on the shares
over the near term.
JPMorgan shares currently retain a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the company's
business model and fundamentals, we also have a long-term Neutral
recommendation on the stock.
JPMorgan, with exposure in almost all banking businesses, is one of
the first two important bankers to kick start the third quarter
results. The release is going to be a significant indicator of
performance in the key banking sector.
Wells Fargo & Company
) is the other bank scheduled to release its earnings on the same
day with JPMorgan.
Close on the heels of JPMorgan and Wells Fargo, the other major
banks gearing to release their earnings are
) on October 15,
Goldman Sachs Group Inc.
) on October 16,
Bank of America Corporation
) on October 17 and
) on October 18.