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JPM Beats but Credit Is Red Flag (Update 3)

Dimon said that "the Firm reported strong performance across all our businesses in the third quarter of 2012. Revenue for the quarter was $25.9 billion, up 6% compared with the prior year, or 16% before the impact of [debit valuation adjustments]."

Dimon added that "business Banking loan balances grew for the eighth consecutive quarter to a record $19 billion, up 8% compared with the prior year," while "Mortgage Banking originations were $47 billion, up 29% compared with the prior year," credit card sales volume increased by 11% year-over-year, and "Commercial Banking reported record revenue and grew loan balances for the ninth consecutive quarter to a record $124 billion, up 15% compared with the prior year."

When discussing credit trends, the CEO said that " housing has turned the corner."

Following Dimon's announcement in May of the hedge trading losses, JPMorgan suspended its share buyback program. The company later applied for Federal Reserve permission to resume its buybacks, even before the regulator conducts its next round of stress tests next year. Dimon said in September that JPM hoped buybacks would "start sometime in the first quarter."

During the media call on Friday morning, Dimon said that if the company were to resume share buybacks during the first quarter it would be "immaterial," because the buybacks would only total $3 billion.

JPMorgan reported third-quarter net interest income of $10.976 billion declining from $11.146 billion the previous quarter and $11.817 billion a year earlier, as the company's core net yield on interest-earning assets narrowed to 2.92% during the third quarter, from 3.00% during the second quarter, and 3.14% during the third quarter of 2011.

The margin decline was in-line with expectations for most -- but not all -- large banks in the prolonged low-rate environment, with the Federal Reserve's target short-term rate in a range of zero to 0.25% since late 2008, while the central bank recently expanded its purchasing of long-term mortgage-backed securities, in an effort to push long-term rates even lower, or at least keep them at their historically low levels.

JPMorgan Chase reported that the average rate for its securities investments during the third quarter was 2.11%, declining from 2.42% the previous quarter, and 2.66% a year earlier.

JPMorgan Chase's shares closed at $42.10 Thursday, returning 30% year-to-date, following a 20% decline during 2011. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.85%.

The shares trade for eight times the consensus 2013 EPS estimate of $5.23.

Stifel Nicolaus analyst Christopher Mutascio -- who rates JPMorgan a "Hold," said that "if we back out sizable gains from the redemption of trust preferred securities ($88 million pre-tax), investment securities gains ($458 million), DVA losses ($211 million) and a one-time hit to the loan loss provision expense ($825 million) attributable to regulatory guidance on certain residential real estate loan portfolios, we put core operating EPS closer to $1.34," which would still be a convincing beat of the consensus estimate.

Mutascio's third-quarter operating estimate for JPMorgan was $1.38, which "did not incorporate the DVA loss, the trust preferred redemption gains or the higher loan loss provisioning due to regulatory guidance." Excluding "the securities gains embedded in our estimate, our core EPS estimate would have been $1.15," he said," which would be "a better apples-to-apples comparison to the core EPS of $1.34 the company reported in 3Q12," making the operating earnings beat even more solid.
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