We are retaining our long-term 'Neutral' recommendation on
JPMorgan Chase & Co.
) despite the announcement of a huge mark-to-market trading loss
for the first six weeks of the second quarter. The affirmation
reflects the company's strong fundamentals and better-than-expected
JPMorgan's first quarter earnings significantly outpaced the
Zacks Consensus Estimate primarily due to higher revenue and
slowdown in provision for credit losses, which were partly offset
by higher operating expense. Further, improved credit quality and a
strong capital position were the other positives.
JPMorgan 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 first-quarter results, which
improved due to buoyancy in the debt and equity markets.
Additionally, the primary strength of JPMorgan's 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
downturn. Also, the company would be able to take advantage of its
strong and stable deposit base once interest rates rise.
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, resulting in a better
On the flip side, the announcement of a significant trading loss
related to a hedging strategy that backfired has raised doubts
regarding the company's risk management abilities. Since the
announcement of the trading loss, JPMorgan has been facing the
wrath of the investors, employees and regulators alike. Moreover,
Fitch Ratings and Standards & Poor's (S&P) pessimistically
revised the assessments for the company. We believe that the
company runs the risk of further hedge-related losses over the
quarter, which would substantially dampen its overall financial
Further, following the trading loss, JPMorgan suspended its
share repurchase program for the time being in order to achieve its
targeted Basel III capital requirements. The company intends to
re-start the program once it rebuilds the capital it lost as a
result of the trading loss. Though we believe that JPMorgan will be
able to withstand this huge loss and soon revive its share
repurchase program, the announcement has dented investors'
confidence in the stock.
Currently, JPMorgan retains a Zacks #4 Rank, which translates
into a short-term Sell rating.
BANK OF AMER CP (BAC): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis Report
To read this article on Zacks.com click here.