One regulatory investigation was recently settled when the company agreed to pay $410 million to settle charges of energy market manipulation.
Before the settlement was announced, JPMorgan said it was considering " strategic alternatives" for its physical commodities business, including energy trading, which would also lower its trading revenue.
KBW's Mutascio in a report on Tuesday considered the effects of a possible preferred equity raise and trading revenue decline in 2014 on JPMorgan's earnings estimate and share-price multiple.
JPMorgan estimated its supplementary Basel III Tier 1 leverage ratio was 4.7% as of June 30."In our analysis, we assume the holding company will maintain a leverage ratio of 6% -- not the 5% proposed by the Fed. In doing so we are ensuring the company maintains an internal buffer over the 5% as well as some capital cushion to downstream to the bank subsidiary level, if needed," Mutascio wrote. Factoring in JPMorgan's estimates of $3.5 trillion in leverage assets under the proposed leverage capital rules, Mutascio estimated the company would need $45.5 billion in additional capital to bring the supplementary Basel III Tier 1 leverage ratio to 6.0%. Based on Mutascio's 2014 EPS estimate of $6.25, along with a similar dividend payout ratio and share buyback plan as JPM put in place for this year, the analyst estimated "the company can generate $21 billion in organic capital." "We have assumed the remaining $24.5 billion shortfall is covered equally by the rationalization of risk weighted assets and the potential for the issuance of preferred stock," Mutascio wrote. If JPMorgan were to issue $12.25 billion in preferred stock, it would lower KBW's 2014 EPS estimate by 19 cents to $6.06. Moving ahead to expected revenue declines from selling the physical commodities trading business and the Volcker Rule, Mutascio estimated that with a $4.0 billion or 32% decline in gross fee revenue, "assuming a 35% tax rate as well as a 35% comp ratio," JPMorgan's earnings would decline by a further 45 cents a share, for a 2014 EPS estimate of $5.61. That would be a 10% earnings reduction for JPMorgan, and the shares would still be trading cheaply, at 9.9 times that hypothetical estimate.
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