JPMorgan Chase & Co.
) is scheduled to release its fourth-quarter and full-year 2013
results tomorrow, Jan 14, before the opening bell.
In the third quarter, massive legal expenses dampened the banking
behemoth's results, making it report a loss of 17 cents per
share. This represented a pause in its strong earnings run for
six straight quarters. However, leaving out the primary
non-recurring items, it delivered an 11.8% positive earnings
surprise thanks to solid performance by its client
Will JPMorgan be able to return to its earnings story after
covering the legal costs this time? Let's see how things have
shaped up for this announcement.
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Factors to Influence Q4 Results
Regulatory and litigation issues spilled over into this quarter
and JPMorgan continued to hit headlines for its wrong doings and
related settlements. The latest in this regard is the upcoming
$2.6 billion settlement of criminal and civil allegations related
to the fraud at Bernard Madoff's Ponzi scheme.
This outflow, which could erode its earnings, brings the total
cost of its legal settlements to nearly $30 billion over the past
two years. The final impact that the settlement will have on
JPMorgan's fourth-quarter earnings depends on the strength of its
legal reserves. Also, as legalities seem to have become part of
the company, it will have to set aside significant funds as
reserves for future settlement costs.
However, continued cost containment through workforce reduction
is expected to support the bottom line. It is on track to reach
its target of axing as many as 17,000 jobs, including
13,000-15,000 positions in mortgage banking, by the end of 2014.
In Nov 2013, Gordon Smith, JPMorgan's chief executive officer of
consumer and community banking said that the bank was all set to
reduce 11,000 of the targeted mortgage banking positions by the
end of 2013.
Though we don't expect any significant improvement in interest
income due to sluggish loan growth and a persistent low interest
rate environment, broad-based strength across product lines
should make up for the shortfall.
Moreover, higher trading revenues and an improvement in
investment banking on the back of enhanced equity market dynamics
should continue to support top-line growth. But lesser mortgage
activity in the quarter may work as a dampener.
Similar to the third quarter, this banking giant failed to
impress analysts with its level of activities. The concern over
the outflow related to Madoff and other settlements forced many
analysts to significantly lower their fourth-quarter earnings
estimates. The Zacks Consensus Estimate has moved down by 3.8% to
$1.25 per share over the last 7 days, as the tendency for a
downward estimate revision was more obvious.
Our proven model does not conclusively show that JPMorgan is
likely to beat the Zacks Consensus Estimate in the fourth
quarter. That is because a stock needs to have both a positive
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
Negative Zacks ESP:
The Earnings ESP for JPMorgan is -4.80%. This is
because the Most Accurate estimate stands at $1.19 while the
Zacks Consensus Estimate is higher at $1.25.
JPMorgan's Zacks Rank #3 (Hold) increases the predictive power of
ESP. However, we also need to have a positive ESP to be confident
of an earnings surprise call.
Stocks to Consider
Here are a few major bank stocks that 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
) has an earnings ESP of +2.38% and carries a Zacks Rank #2. It
is scheduled to report fourth quarter results on Jan 23.
The earnings ESP for
M&T Bank Corp.
) is +3.85% and it carries a Zacks Rank #3. The company is
expected to release fourth quarter results on Jan 15.
SunTrust Banks, Inc.
) has an earnings ESP of +1.43% and carries a Zacks Rank #3. It
is scheduled to report fourth quarter results on Jan 17.
In the banking sector, JPMorgan, which has exposure in almost all
banking businesses, will be kicking off the fourth-quarter
earnings season with
Wells Fargo & Co.
). Therefore, the release will be a significant indicator of
fundamental performance by the key banking sector.