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JPM Beats but Credit Is Red Flag (Update 3)

The analyst said that the earnings beat mainly reflected "mortgage banking revenues came in $450 million higher than we anticipated due to strong origination volume ($0.08 per share)," investment banking fees at $260 million higher than his estimate, for five cents a share, and "a slightly lower tax rate than we expected ($0.03 per share)."

In its "Read-Across for Financial Sub-sectors," KBW said that based on JPMorgan's "strong quarter of mortgage originations (up 8% QoQ) of $47.3B, while retail channel originations declined 2%" sequentially, "we expect the upside potential to BAC's mortgage numbers to be on the small side at $100-$200M, given that JPM's positive results in 2Q12 did not seem to translate into significant upside to BAC's quarterly results, which we believe is representative of BAC's recent market share declines."

KBW analyst David Konrad rates JPMorgan "Outperform," with a $49 price target, while KBW analyst Jefferson Harralson rates Bank of America "Market Perform," with a $10 price target.

Commenting about mortgage repurchase demands, KBW said that JPMorgan's mortgage putback "reserve was up from 2Q's $36M number, and while still well below trends of the previous year, it does seem to somewhat contrast last quarter's statement that it was substantially compete with reserving. This increase gives us slight pause as we extrapolate to BAC's likely reserve but we feel that it is more likely that we see BAC's rep and warranty reserve come in below our $400M estimate in the quarter given JPM's low overall reserve level."

JPM Chart JPM data by YCharts

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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