JPMorgan Is Good For $46 Despite A Whale Of A Trading Loss

JPM: JP Morgan Chase logo
JP Morgan Chase

JPMorgan Chase (NYSE:JPM) announced its performance figures for the second quarter of the year last Friday, surprising investors with a better-than-expected income statement for the period. [1] The biggest relief came when the diversified global banking institution finally quantified the losses it incurred on its super-sized hedging portfolio. The final figure of $4.4 billion, though quite large, is still less than half the $9 billion loss analysts estimated. An overall strong performance by its retail banking business helped keep the bottom-line up despite the debacle.

However, it must be noted that JPMorgan’s results come with various one-time adjustments – some of them quite optimistic – besides the rather unusual decision by the bank to restate its Q1 2012 figures. [2] The restatement reduces Q1 2012 net income by $459 million and is clearly an attempt to push some of the hedging losses to the previous quarter.

Considering the impact of the trading loss on JPMorgan’s total value, we have revised our price estimate for JPMorgan’s stock downward from $48 to $46. This is still about 30% above market prices – with the deteriorating debt situation and the more recent energy market and LIBOR manipulation charges against JPMorgan weighing against its stock.

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Retail Banking Business Reports Decent Growth & Strong Credit Improvements

Weak capital markets over the second quarter were expected to show in the results for all major banks as a decline in investment banking revenues, even as retail banking businesses yield results. This belief was reinforced by JPMorgan’s reported figures for the Retail Financial Services (RFS) division which encompasses its consumer banking, mortgage banking and real-estate businesses. RFS revenues grew by 4% over the previous quarter, while the division’s net income shot up by almost 30%.

The chunk of this improvement in bottom-line figures can be traced to its real-estate portfolio which reported a $554 million benefit from a reduction in provisions, compared to a $192 million benefit in Q1 2012 and a $954 million loss in Q2 2011.

And Quite Some Effort Went Into Limiting CIO Loss To $4.4 Billion

JPMorgan clearly took some big steps to reduce its loss from the hedging portfolio handled by its London-based Chief Investment Office (CIO). Since the announcement in early May about the losses, the CIO has been selling off profitable, high-yield assets which formed its huge portfolio, earning a $1 billion pre-tax profit from these sales (see JPMorgan’s Trading Losses Could Climb, Sold Profitable Securities To Cushion Impact).

Also, it was clearly the need to keep the final loss figure low that led to the restatement in Q1 2012 figures. We capture the impact of the loss on JPMorgan’s value through the non-interest income component of its Corporate/Private Equity business unit shown above.

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  1. 2Q12 Earnings Press Release, JPMorgan Press Releases, Jul 13 2012 []
  2. 8-K filing – Press Release, JPMorgan Press Release, Jul 13 2012 []