Dimon's Political Victory Rings Hollow for Shareholders: FBR

NEW YORK (TheStreet) -- FBR analyst Paul Miller said on Thursday that JPMorgan Chase (JPM) CEO James Dimon's "political victory" on Wednesday was not enough to lift the company's shares out of their current trading range.

Dimon on Wednesday testified before the Senate Banking Committee, saying that JPMorgan would be "solidly profitable" for the second quarter, while not providing an updated figure for the company's hedge trading losses, previously estimated to be $2 billion.

The CEO said he was sorry that after being instructed to "reduce risk-weighted assets and associated risk" in its hedging portfolio -- in anticipation of new Basel capital requirements -- the firm's Chief Investment Office (CIO) "embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones," leading to the losses, rather than simply reducing existing positions.

Miller said that "members of the Senate Banking Committee largely avoided tough or uncomfortable questions," and "on the rare occasion when a well-written question was asked, Dimon was good at deflecting a direct answer, and senators did not press for a full response nor did they have a relevant follow-up question."

Republicans on the Committee also used their questions to attack the Dodd-Frank banking reform legislation and the Volcker rule," which Miller said "maintains Republicans' ability to make changes to Dodd-Frank post the election."

Miller said that there were still "fundamental questions about the impact of the trading loss and visibility into the bank's true earnings power without a fully operational investment office," and that "Mr. Dimon failed to answer repeated questions relating to why the CIO moved to a different value-at-risk (VAR) model and its failure to disclose the move even when there was a significant change."

JPMorgan's shares closed at $34.30 Wednesday, returning 5% year-to-date, following a 20% decline during 2011. The shares have declined 16% since closing at $40.74 on May 10, just before Dimon disclosed the second-quarter trading losses.

The shares trade just below their reported March 31 tangible book value of $34.91, and for six times the consensus 2013 EPS estimate of $5.33, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.33.

Miller rates the shares "Market Perform," with a $37 price target, estimating JPMorgan Chase will report GAAP earnings $4.05 a share this year, followed by EPS of $5.18 in 2013. His operating EPS estimates are $5.00 for 2012 and $5.27 for 2013.

The analyst said "there is no doubt that JPMorgan remains a strong, well-capitalized bank," but that "the true earnings power of the company has become unclear." Prior to the CIO loss, "many investors were even expecting the bank to earn upwards of $7.00 in FY14," he said, adding "now, we wonder whether the company can still produce those earnings as we still do not know how much the CIO contributed to overall profitability over the last few years."

On a positive note, Miller said that "JPMorgan is the best positioned out of the big four" U.S. banks -- also including Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) -- "to take advantage of dislocation in the market, but in the end, it may struggle to truly grow its balance sheet in a weak economic environment."

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