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JPMorgan Likely to Focus on Cost Cutting Next Week

NEW YORK (TheStreet) -- JPMorgan Chase (JPM) will hold its annual Investor Day meeting next Tuesday, and in addition to the usual upbeat tone from CEO James Dimon and other executives, analysts expect a focus on cost-cutting.

It's been a rough two years for the bank, including the "London Whale" hedge trading debacle during 2012, and $17.5 billion in residential mortgage-backed securities settlements during the fourth quarter, followed by a deferred prosecution agreement with the Department of Justice over JPMorgan's role in the Bernard Madoff Ponzi scheme. That last item was announced in January, but lowered the company's fourth-quarter earnings.

Looking ahead, JPMorgan's outlook for 2014 and 2015 could include an expected return on tangible common equity (ROTCE) in a range of 14 to 14.5%, down from management's previous outlook of a 16% return on equity, according to Evercore analyst Andrew Marquardt.

That may be a tough pill for investors to swallow, but the company's fully loaded Basel III Tier 1 common equity ratio target is a range of 10.0% to 10.5%, which it expects to reach by the end of 2015. The estimated Basel III Tier 1 common ratio was 9.5% as of Dec. 30.

One way JPMorgan could counter the effect of the higher level of regulatory capital would be to lower its risk-weighted assets (RWA). Marquardt in a note to clients on Wednesday estimated JPMorgan would need to lower its risk-weighted assets by $143 billion to maintain a 16% ROTCE, "all else equal."

The bank's ROTCE during 2013 was 11%, declining from 15% in 2012.

Jefferies analyst Ken Usdin believes "JPM could provide additional color on future expense containment that could further support the story." The story is that of a cheap bank stock with plenty of room to run. Usdin rates JPMorgan a "Buy," with a $66 price target, implying 13% upside over the next 12 months from Tuesday's close at $58.49.

JPMorgan's shares at Tuesday's close traded for just 9.2 times the consensus 2015 earnings estimate of $6.34, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.98.

But the low forward P/E ratio doesn't mean the shares won't slide if the company significantly lowers its ROTCE outlook next week. Usdin in a client note on Tuesday estimated the return on equity target would be lowered to 15%, making him a bit more optimistic than Marquardt.

Marquardt rates JPMorgan "overweight," with a price target of $62.00. On the cost-cutting front, Marquardt wrote that he expects the bank's management "to formally shift from branch build to more mobile/ electronic banking (less bricks more clicks) to cut costs."

When JPMorgan's branch network during the bank's earnings conference call last month, CFO Marianne Lake said, "we've completed building out our key expansion markets, including California and Florida, and have reached leadership positions in each of our key markets. So we feel good about our footprints, at or around this level of 5,600 branches plus or minus, and our focus from here is on optimization including branch size and usage and leveraging digital capabilities."

But Marquardt expects a change of direction, estimating JPMorgan could save $1 billion a year by closing roughly 1,000 branches and relocating another 1,000.

Usdin expects cost-control to "share the stage with growth plans" next week. "While we do not know what mechanism JPM will use to underpin the cost story, our own estimates hold that the company could operate with an efficiency ratio in the mid-50's long-term." The efficiency ratio is a bank's percentage of overhead expenses to revenue. JPMorgan's efficiency ratio during 2013 was 73.45%, increasing from 62.92% in 2012, according to Thomson Reuters Bank Insight.

Shares of JPMorgan Chase were down 0.8% in late morning trading Wednesday, to $58.03.

This chart shows the performance of JPMorgan's stock against the KBW Bank Index I:BKX and the S&P 500 ^GSPC since the end of 2011:

JPM Chart data by YCharts

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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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