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JPMorgan Settlement Could Wipe Out Q3 Earnings

In the meantime, with the daily leaks of wildly diverging settlement figures, Kotowski is now factoring a $5 billion global legal settlement into his EPS estimate for JPMorgan. "We obviously have no idea what it will be, but in putting a $5B assumption into our estimate, we want to point out that even this amount would leave JPM with earnings comfortably above its dividend."

JPMorgan pays a quarterly dividend of 38 cents a share, for a yield of 2.94%, based on Wednesday's closing price of $51.70.

But based on Kotowski's figures, an $11 billion third-quarter settlement would completely wipe out JPMorgan's third-quarter results.

A quarterly loss would not threaten the dividend, as it wouldn't be an operating loss, and the dividend is still relatively modest compared to JPMorgan's underlying operating earnings power.

Kotowski rates JPMorgan "outperform," with a $71 price target, and estimates the bank will earn $5.30 a share this year, with EPS growing to $6.44 in 2014.

Deutsche Bank analyst Matt O'Connor expects a much smaller hit to earnings for JPMorgan this quarter, estimating the company "may have existing legal reserves of $4-6b (of the $18b they've taken since 1Q10."

"Adding in another $2b for legal reserves assumed in 3Q13 suggests additional hits should be manageable both in context of reserves/charges likely to be taken and the $5-6b of net income JPM earns per quarter," O'Connor wrote in Deutsche Bank's third-quarter large-cap banks preview late Wednesday. "Maybe more importantly is what it means to other banks if/when JPM settles on some of the broader mortgage issues."

O'Connor estimates JPMorgan will report third-quarter EPS of $1.25. The bank remains one of is "top picks" among bank stocks, as it has the lowest price-to-earnings ratio "of the market sensitive banks" based on Deutsche Bank's operating earnings estimates for 2013, 2014 and 2015.

JPMorgan's stock is indeed cheap. The shares at Wednesday's close traded for 8.5 times the consensus 2014 EPS estimate of $6.08, among analysts polled by Thomson Reuters. Among the 24 components of the KBW Bank Index (I:BKX), the only other stock trading for less than 10 times its 2014 consensus estimate is Citigroup (C - Get Report), which closed at $49.26 Wednesday, or 8.9 times the consensus 2014 EPS estimate of $5.56.

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