Credit leverage -- with continuing boosts to earnings from the release of loan loss reserves and expense reductions from cuts in staff working on nonperforming assets -- will continue, partially offsetting the expected revenue declines, although the analyst pointed out that "cost cuts are partly offset by high compliance and legal costs."
This is especially true for JPMorgan Chase (JPM) itself, with CFO Marianne Lake on Sept. 9 saying at a conference that the bank was expecting net losses in its mortgage origination business during the second half of 2013, and that a "crescendo" of regulatory activity would lead to additions to third-quarter additions to litigation reserves "which will more than offset the $1.5 billion or so of consumer reserve releases."
Getting back to Citigroup, Juneja estimates the company will report third-quarter revenue, net of interest expense, of $18.821 billion, declining from $20.479 billion in the second quarter. Revenue is expected to increase from $13.703 billion in the third quarter of 2012, however, the company booked $3.470 billion other-than-temporary impairment losses on its (then) 35% remaining share of the retail brokerage joint venture with Morgan Stanley (MS).
Citigroup's is the cheapest among the large-cap banks covered by Juneja, to his forward earnings estimates. The shares closed at $51.20 Tuesday and traded for 9.8 times Juneja's 2014 earnings estimate of $5.25 a share. The analyst has a neutral rating on Citigroup, with a $54 price target.Juneja doesn't cover his own firm, whose stock is arguably even cheaper than Citi. JPMorgan's shares closed at $53.09 Tuesday and traded for 8.7 times the consensus 2014 EPS estimate of $6.09, among analysts polled by Thomson Reuters. Investors holding shares of Citigroup and JPMorgan may be traveling a rocky road through the end of 2013, with plenty of revenue concerns and a continuing flow of leaks, settlements and other negative headlines for JPMorgan. But long-term value investors who can make a multiyear commitment may be looking at quite an opportunity to load up on cheap bank stocks. -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn
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