Updated to reflect additional analyst comments and added data throughout.
NEW YORK (TheStreet) -- All eyes will be on JPMorgan Chase (JPM) as it kicks off second quarter bank earnings on Friday and tries to stem a 15% stock drop since it disclosed a multi-billion dollar trading loss in May.
An earnings report that shows JPMorgan has exited most of a 'poorly conceived and vetted' trade at an approximate $5 billion loss may put a floor on the banks' share woes.
JPMorgan's expected near 40% year-over-year drop in second quarter earnings will be driven by new disclosures on the losses of an obscure trading position in corporate credit derivatives from its Chief Investment Office, a unit of the bank that sits outside of its core operations and invests excess deposits.The primary concern is whether the bank has unwound the vast majority of the loss-making trade, or if CIO losses will linger as a risk to the bank's earnings and reputation in coming quarters. CEO Dimon will detail the loss in a two-hour session with analysts after earnings are released on Friday. While Jamie Dimon has already been candid about his failure to properly manage the unit that made the backfired trade, he nevertheless needs to deliver on assurances that the bank can manage and unwind the position, which Bloomberg previously reported was in the $100 billion range. After delivering industry-leading profitability in the first quarter, the bank was rattled when a 'London Whale' trade it had amassed in illiquid credit products soured, causing CEO Dimon to disclose a $2 billion loss that could grow in size as JPMorgan exits the position, reshuffles top executives and retools risk assessment models. Dimon called his mismanagement of the situation an instance of egg in his face in May, but the bigger question is whether he can get a handle on it and stem further earnings or reputational bleeding. For America's largest and most profitable bank, a focus on trading losses are an unfamiliar position - and an opportunity. "The size of the loss is not really the issue, the issue is has it been dealt with," says Marty Mosby, a bank analyst with Guggenheim Securities, who notes JPMorgan shares could bottom if the bank reports it has unwound most of the failed trade and at a loss in line with recent media reports and analyst estimates of between $4 billion and $9 billion. "Anything less than $10 billion and we believe the management team can keep moving along," he says. JPMorgan's shares have fallen over 15% since it disclosed the loss. In Thursday afternoon trading, JPMorgan shares were off nearly 1% to $34.36, even as some analysts reiterated positive expectations for the bank's earnings. "We believe if the gross trading losses are $5 billion or less and the company can prove it has 'ring fenced' the problem, the stock will rally," said RBC Capital Markets analyst Gerard Cassidy, in a Thursday note to clients. That forecast is contingent on JPMorgan's reporting solid core earnings.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV