JPMorgan Q3 Earnings Preview: What Interest Us Most

In what has come to be a long-standing tradition, JPMorgan Chase (NYSE:JPM) will kick off the earnings season among the banks when it posts its performance figures for the third quarter before the bell this Friday. With a significant presence across banking verticals, JPMorgan’s results generally set straight investor expectations from the other banks’ earnings.

We will keep an eye out for two things in particular in the bank’s income statement: revenues from its corporate & private equity business unit and the performance of its investment banking arm. Specifically, we are interested in how much additional losses JPMorgan booked this quarter from the hedging bet that went wrong and how well the sales and trading desk has performed in the improved market conditions this quarter.

We maintain a $45 price estimate for JPMorgan’s shares, which is about 10% above its current market price.

See our full analysis of JPMorgan

The Hedging Losses Were Hopefully Capped This Quarter

In May 2012 JPMorgan stunned investors, customers and regulators with its announcement that a hedging strategy that its London-based Chief Investment Office had entered into will result in a multi-billion dollar loss. As part of its Q2 2012 earnings release, the bank quantified the loss figure at $5.8 billion, with $4.4 billion attributed to Q2 2012 and an additional $1.4 billion in losses pushed into a restated Q1 2012 earnings statement.

But that does not close the chapter on this incident as the portfolio is expected to linger on for a few more quarters due to maturity of the underlying securities. And this only means more losses over this quarter as well as the next one. Earlier, JPMorgan pegged additional losses over Q3 and Q4 2012 between $1 and $1.5 billion. But, we are quite wary of this estimate because when JPMorgan initially announced the incident, it claimed total losses will be around $2 billion while the actual figure is almost three times that value already.

And Trading Results Should Reflect Strong Debt Market Conditions

The global markets have improved this quarter with both debt and equity markets rallying over growing optimism about recovery plans for the Eurozone, the prospect of a sustained US economic recovery and additional measures taken by the Fed. The U.S. stock market, for instance, recently scaled the peaks it last witnessed in December 2007, and the demand for debt securities has also been higher than over previous quarters boosting debt origination fee income.

What we would really like to see is how well JPMorgan capitalized on the positive market conditions – something which can be judged simply by the improvement in the bottom-line figures for its investment banking and trading operations. Besides healthy growth in sales and trading revenues, we expect to see a marked improvement in JPMorgan’s debt origination figures for the quarter.

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