We have reiterated our long-term Neutral recommendation on
JPMorgan Chase & Co.
), based on strong fundamentals and steady performance by its
business segments. Further, despite reporting a significant trading
loss in the second quarter of 2012, the company substantially
outpaced the Zacks Consensus Estimate.
Results primarily benefited from lower operating expenses and
slowdown in provision for credit losses, which were partly offset
by lower top line.
JPMorgan also benefited from the gradually improving macro-economic
elements. Though there are increasing concerns related to the
stability of the European economy, better equity-centric activities
in the U.S. are expected to support its results in the upcoming
quarters. This was reflected in the second quarter results, which
improved due to buoyancy in the capital markets.
Further, we believe that the main reason behind JPMorgan's robust
earnings stability amidst the ongoing economic recovery lies in its
business diversification. The spread of its portfolio may prove to
be as much of a positive during the recovery as it was during the
The company will also be able to take advantage of its strong
deposit base once interest rates rise. Despite the overall sluggish
economic environment, the company's total deposits surged 6% from
the prior-year period to $1.12 trillion in the first half of 2012.
Moreover, though the Federal Reserve's requirement of maintaining
higher capital cushions is expected to significantly impact the
lending ability of major banks like
Bank of America Corporation
), JPMorgan is expected to comfortably deal with the challenge as
it is in a relatively good shape from a capital perspective due to
its earnings power. We expect the company to continue building
capital over the next couple of years, paving the way to a better
On the flip side, the announcement of a significant trading loss
related to a hedging strategy that backfired has raised doubts
regarding JPMorgan's risk management capabilities. Though the
company announced a number of measures to control future losses, we
believe it will take time to fully recover from the financial
impact of the losses already incurred.
In addition, JPMorgan's top-line growth is expected to be sluggish
in the upcoming quarters owing to weak trading revenue and net
interest margin (NIM) contraction. Also, the pressure on NIM could
put its traditional banking businesses at stake. Moreover, with the
thrust of new banking regulations, there will be a pressure on
fees, and loan growth is likely to remain feeble.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into
a short-term Hold rating.
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JPMORGAN CHASE (JPM): Free Stock Analysis
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