Banks

Return to Article

JPMorgan Chase Braces for 'Noisy' Quarter

Laurie Kulikowski

In two weeks, investors will look under the hood of JPMorgan Chase (JPM Quote) to see how the big bank fared in its first full quarter since it acquired failed thrift Washington Mutual.

JPMorgan Chase has thus far largely skirted big losses from the credit crisis, but the bank is expected to reveal that it succumbed to the difficult environment that has hit many of its peers when it unveils fourth-quarter results on Jan. 21. Analysts on average expect the bank to post earnings of just 6 cents a share, according to Thomson Reuters. In the year ago quarter, JPMorgan Chase made 86 cents a share.

"It's going to be an incredibly noisy quarter again," says Jaime Peters, an analyst at Morningstar. JPMorgan Chase is "the most realistic of banks. They haven't tried to paint rosy pictures. I would expect more candid answers of what they're seeing in the economy and what they think the future will hold" for both the company and banking industry in general, she says.

"If you look at the big four, the only other company that hasn't digested somebody is Citigroup (C Quote), which has significant problems of their own," Peters says. "It's going to be a little tough to compare the banks head-to-head this quarter. At the same time, when you start going down to the fundamentals, it will be interesting to see who is holding up a little bit more and who is not."

Oppenheimer analyst Meredith Whitney in a Jan. 6 industry note predicts JPMorgan Chase will write down $3.4 billion in the fourth quarter and will increase its fourth-quarter loan-loss provision some 145% to $6.2 billion for losses, up from $2.5 billion in the year earlier quarter. That would be the largest provision increase among the big banks like Bank of America (BAC Quote), Wells Fargo (WFC Quote) and Citi, she said.

Whitney says banks will "once again have to raise fresh capital" this year, even with the new capital infusions through the Treasury's Troubled Assets Relief Program, or TARP. She predicts $40 billion in writedowns and provisions for large-cap banks she covers and expects capital needs to be amplified by new ratings downgrades.

Since late 2007, Whitney has forewarned investors that as more risky securities are downgraded by rating agencies, banks will be forced to raise more capital. Since July 2007, more than $5 trillion worth of securities have been downgraded, "but our concern here is that the pace of downgrades has only accelerated through 2008," she writes in the note on Tuesday.

One cause for concern at JPMorgan Chase is its late September acquisition of Washington Mutual. The company has already taken a $1.9 billion -- $1.2 billion after-tax -- loan loss adjustment related to WaMu and is likely to add to reserves for losses in WaMu's credit card portfolio, the bank said during a November investor presentation.

JPMorgan Chase acquired the Seattle thrift for roughly $2 billion, after it was seized by regulators. The fourth quarter will be the first full quarter in which JPMorgan Chase's earnings will include its purchase of WaMu -- and the results are not likely to be pretty.

Merger costs aside, Peters says it's likely that the bank will be forced to take further charges for the WaMu acquisition, despite the large provision it already took in the third quarter for losses on the loan portfolio.

"They did take a large provision on that book in the third quarter, however, we have seen a few [banks] report early numbers and it's looking like the deterioration has been much more rapid," she says.

Ladenburg Thalmann analyst Richard Bove, however, called the WaMu acquisition a "sweetheart deal" that "should contribute meaningfully to earnings" in a Dec. 8 note. While Bove cut 2008 projections, he raised estimates for the bank in 2009 and upgraded the stock to a buy rating from neutral.

"JPMorgan Chase acquired all of the positive aspects of Washington Mutual -- its deposits and branches -- and avoided taking on most of the negatives -- its mortgage business and capital obligations," he wrote.

However, in the near future, widened spreads on securities will lead to further writedowns, severance costs associated with the WaMu deal, and a weak investment banking business, will hurt the company, Bove said. JPMorgan also will have to pay much more in dividend costs associated with the $25 billion preferred equity stake it sold the government in October, he wrote.

Analysts at Deutsche Bank on Monday cut estimates on JPMorgan and several other banks, including Citi and US Bancorp (USB Quote), due to increasing concerns on the loan losses.

Deutsche analyst Mike Mayo estimates JPMorgan will earn 18 cents a share in the fourth quarter, but cut 2009 estimates by 65 cents to $2.05 a share to reflect higher loss rates and lower revenue. He also shaved his earnings estimates for 2010 as well.

"Worsening economic trends should put additional pressure on JPMorgan Chase's loan portfolios," particularly the bank's credit card portfolio, home equity and residential and commercial mortgages, and the banking industry in general, Mayo writes.

CNBC reported on Monday that JPMorgan Chase may post a loss in the fourth quarter. CEO Jamie Dimon is also expected to say that he will not take a bonus for 2008, the news outlet said.

Dimon foreshadowed the expected difficult quarter in mid-December interview on CNBC, in which he said the company is prepared for another difficult year.

"We took a lot of risk with Bear Stearns and WaMu," he said. "If home prices go down 25% it could cost us another $10 billion to $20 billion in WaMu. So we're not sitting here declaring a victory."

Dimon said home price depreciation is "causing a lot of problems" for homeowners and lenders. "So you know, stopping prices going down will be a very big fix to this whole problem and low mortgage rates [are] very beneficial for that," he said.

Still, given the Treasury's $25 billion capital injection into JPMorgan Chase, Dimon said the bank is lending in most areas, such as large corporate loans and other commercial loans to municipalities and hospitals. On the consumer side, credit card loans and student loans are also up, but other areas, such as auto loans, were tightened up, he said.

Nancy Bush, an independent analyst at NAB Research in Annandale, N.J., has a more optimistic view of the firm. She estimates 22 cents a share for JPMorgan Chase's operating earnings, which excludes one-time items.

"You've got Washington Mutual kicking in already. It was immediately accretive just because the way the deal is done," Bush says. Also credit quality "is not that dire, relative to the competition."

Bush interprets the cautious comments from Dimon and US Bancorp executives, among others, to mean that even relatively good banks "are going to take the opportunity to make this the mother of kitchen-sink quarters."

At this point, "we need to get a frank assessment of 2009 and when he thinks the environment will start to turn," she says, "And more importantly, what will be the indicators he is looking for? That's what we're all grappling with right now ... What do we need to be looking for to tell us that the light is at the end of the tunnel?"