JPMorgan: 'Whale' Loss Winner (Update 1)

Updated with market close information.

NEW YORK (TheStreet) -- JPMorgan Chase (JPM) was the winner among the largest U.S. financial names on Friday, with shares rising 6% to close at $36.07.

The Dow Jones Industrial Average rose over 200 points, after JPMorgan reported a second-quarter profit of $5 billion, or $1.21 a share, soundly beating the consensus estimate of a 72-cent profit, among analysts polled by Thomson Reuters.

The KBW Bank Index (I:BKX) rose over 3% to close at 45.91, with all 24 index showing gains of at least 2%.

JPMorgan CEO James Dimon had in May estimated that the second-quarter hedge trading loss by its Chief investment Office (CIO) estimated at would be "slightly more than $2 billion." The trading losses for the second quarter in fact totaled $4.4 billion, and the company also said it would restate its first-quarter earnings by $459 million, but investors cheered several positive developments:

• Mortgage revenue increased to $2.3 billion during the second quarter, from $2.0 billion during the first quarter, and $1.1 billion in the second quarter of 2011.
• Total noninterest expense declined to $15.0 billion in the second quarter, from $18.3 billion the previous quarter, and $16.8 billion a year earlier, mainly reflecting a decline in litigation expenses, but also a reduction in compensation expenses to $7.4 billion, from $8.6 billion in the first quarter (the annual seasonal spike for bonuses), and $7.6 billion in the second quarter of 2011.
• Period-end commercial banking loans grew to $120.5 billion as of June 30, from $115.8 billion the previous quarter, and $102.7 billion a year earlier.

The second-quarter bottom line was boosted by a $2.1 billion release of loan loss reserves, representing 33 cents a share, after tax, and $0.8 billion, or 12 cents a share, after tax, in debit valuation adjustments (DVA).

Dimon said during JPMorgan Chase's earnings conference call that "we've significantly reduced the total synthetic credit risk in CIO," and that "hopefully, if all goes well, we can start buying back stock early in the fourth quarter," resuming the share buyback program that was suspended in May after the CIO hedge trading losses were first disclosed.

Dimon said the company could "can get to 9% Basel III [Tier 1 common equity ratio] by the end of 2013 and buy [back] $23 billion, we can get to 9.5% and buy $15 billion. So clearly, we have the ability."

JPMorgan's shares have now returned 11% year-to-date, following a 20% decline in 2011. Based on a 30-cent quarterly payout, the shares have a dividend yield of 3.33%.

JPM data by YCharts

The shares trade for seven times the consensus 2013 EPS estimate of $5.28. The consensus 2012 EPS estimate is $4.19.

Stifel Nicolaus analyst Christopher Mutascio rates JPMorgan a "Hold," and said on Friday that after backing out the one-time items during a quarter with "significant noise," he "could arrive at a core quarterly EPS run-rate in the $1.35 range."

The analyst said that "areas in which the company clearly beat our expectations were: 1) mortgage banking income came in at $2.27 billion versus our estimate of just $1.61 billion, and 2) operating expense were $14.97 billion versus our estimate of $15.55 billion," combining "for a $1 billion beat, or $0.17 per share, relative to our expectations."

Mutascio's areas of concern include "1) the company's net interest income came in at $11.15 billion, which is down from the 1Q12 level of $11.67 billion and lower than our $11.84 billion estimate - with the net interest margin falling to 2.47% from 2.61% in 1Q12, and 2) the company's estimated Basel III tier 1 common capital ratio was 7.9%, down from the originally reported 1Q12 level of 8.4% and the restated 1Q12 level of 8.2%."

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

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