JPMorgan Chase: Earnings Preview

JPMorgan will give Wall Street its first read on how the big banks fared in the first quarter on Wednesday, and its performance on the topline will get close inspection.
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NEW YORK (

TheStreet

) --

JPMorgan Chase

(JPM) - Get Report

will give Wall Street its first read on how the big banks fared in the first quarter on Wednesday, and investors who have snapped up shares of the big banks in the past six weeks or so are hoping history doesn't repeat itself.

A revenue shortfall for CEO Jamie Dimon's juggernaut in the fourth quarter sparked a sell-off in the group in late January, and given the general run-up in the stocks since March, a disappointment this time around could prompt an even sharper pullback.

Wall Street is expecting JPMorgan to record strong earnings growth from the depths of early last year, but the average analysts' estimate for the March quarter still represents a sequential decline from its profit in the fourth quarter. Dimon, however, is known for his ability to manage profit expectations by guiding to the low side, and the company has managed to outperform the consensus view for the past four quarters.

JPMorgan was one of few large banks that was able to post a consistent profit throughout the financial crisis and it took advantage of the dislocation in the industry to purchase both

Bear Stearns

and

Washington Mutual

in 2008. In the first quarter, the company continued to wheel and deal as it reached an agreement in February to purchase the global oil, global metals and European power and gas assets of

RBS Sempra Commodities

for $1.7 billion.

The rest of the big banks will be reporting over the next two weeks or so with reports coming due from

Bank of America

(BAC) - Get Report

(Friday, April 16),

Citigroup

(C) - Get Report

(April 19)

Goldman Sachs

(GS) - Get Report

(April 20),

Morgan Stanley

(MS) - Get Report

(April 21), and

Wells Fargo

(WFC) - Get Report

(April 21).

Earnings:

The current average estimate of analysts polled by

Thomson Reuters

is for JPMorgan to earn 64 cents for the first three months of the year, 60% higher than its profit in the year-earlier quarter, but a slide from earnings of 74 cents a share in the fourth quarter. Analyst estimates ranged from as low as 45 cents to as high as 74 cents a share for the March period.

A key factor for investors will be the ability of banks to show that they have a firm grasp on the continuing credit issues. While many banks, including JPMorgan, cautiously said last quarter that they were beginning to see improvements on the consumer side, losses at JPMorgan are expected to tick upwards related to a credit card payment holiday that the company implemented for a short time last summer.

"While there has been some improvement in delinquencies and home prices in some markets, we believe that significant improvement will depend largely on an improving economy," Dimon said on April 1 in the company's annual letter to shareholders.

Dimon also went on the record saying he expects the company's home-lending portfolio to continue to lose money over the next three years as JPMorgan works through "a backlog of problem loans."

"The losses come not only from charge-offs but from the costs of managing delinquencies and foreclosures," Dimon said.

In addition, commercial lending, specifically commercial real estate, remains a concern, although compared to the rest of its big bank brethren, JPMorgan has relatively low exposure. According to independent research firm

CreditSights

, JPMorgan's CRE exposure is roughly 3.5% of its total loan book, compared to 5.3% for Bank of America and 10.6% for Wells Fargo.

JPMorgan has some of the strongest reserve levels in the industry at $31.6 billion, or 5.5% of total outstanding loans at Dec. 31, and Wall Street will be waiting to see when it will stop recording quarterly loan provisions for future losses as well as any commentary on when reserves will actually begin to be released.

Revenue:

Revenue is expected to come in at $26.47 billion for the latest three-month period, according to

Thomson Reuters

, down 1.7% from the year-ago equivalent period, but up from $25.2 billion in the fourth quarter.

JPMorgan's Investment Bank unit is expected to see trading-related revenue improve dramatically on a sequential basis, fueled by strong fixed income activity and a modest improvement in equity trading, according to Moshe Orenbuch of Credit Suisse.

Overall, however, revenue at the Investment Bank unit could be held back by fewer M&A advisory fees and lower equity underwriting fees (compared to the strong business in the back half of 2009) in the first quarter, according to Sandler O'Neill analyst Jeff Harte, who recently trimmed his first-quarter estimate by 2 cents to 68 cents a share and his 2010 profit view by 3 cents to $3.23 per share, primarily because of an expectation for reduced capital markets revenue.

"While the underwriting environment did improve during the historically strong month of March, the boost was not enough to offset the revenue drag from an early quarter slowdown," Harte wrote in a note.

"We continue to believe that the early 2010 slowdown in completed

M&A transactions has been more a function of postponements than canceled transactions," Harte wrote. "We expect investment banking activity levels to rebound in

the second quarter and note that the industry equity underwriting pipeline as increased 125% since the start of the year."

On the consumer side of the balance sheet, JPMorgan continues to work through problems in its home lending and credit card businesses. JPMorgan has been hit with soured home loans in both prime mortgages and home equity loans as well as weak credit card metrics from the record high unemployment levels.

Credit Suisse's Orenbuch is expecting "weak" quarterly results in JPMorgan's retail financial services segment, citing the impact of lighter lending and deposit fees, as a result of fewer overdraft fees, and elevated credit costs, he wrote in a note last week. Orenbuch is estimating that JPMorgan's consumer lending book will shrink $10.5 billion, or 3%, from the fourth quarter.

A big issue on the regulatory front is changes to overdraft policies expected to be implemented this summer. To comply with the regulatory changes, JPMorgan has revamped its overdraft policies in which customers must now opt-in in order to receive overdraft services for debit cards.

"These changes are ongoing and complex," Dimon said in the letter to shareholders. "We hope to complete them with minimal disruption and maximum consumer satisfaction. While costly (we estimate these changes will reduce our after-tax income by approximately $500 million annually), we believe these moves will strengthen our long-term relationship with our customers."

Stock Performance:

JPMorgan's stock is up more than 10% year-to-date based on Monday's close at $46.14, and it currently trades at a forward price-to-earnings multiple of 9.86 times the average estimate for its 2011 earnings, according to

Yahoo Finance

. That compares to multiples of 9.63 times for Bank of America, 13.69 times for Citigroup, and 11.27 times for Wells Fargo.

The stock has battled back after tanking in the wake of its fourth-quarter report on Jan. 15. The shares closed at $44.69 on Jan. 14, then sold off in four of the next five sessions, eventually sinking to an intraday near-term low of $37.03 -- a decline of 17% -- on Feb. 5 before beginning to turn things around.

Indicative of the bullish expectations surrounding the first-quarter report, Monday's close above $46 was the first for JPMorgan shares since Oct. 16. The stock's next hurdle will be the 52-week high of $47.47 reached on Oct. 14, and the first-quarter numbers are sure to tell the tale of whether it gets there any time soon.

Sandler O'Neill's Harte evidently thinks the stock still has some upside. He raised his target price to $50 recently, citing expansion in bank multiples of late and the quality of JPMorgan's franchise. Other analysts covering the company apparently agree as the median 12-month price target for the stock is sitting at $54, implying upside of more than 15% from current levels.

Wildcard:

Dimon has put in noticeably more time in Washington, hoping to influence lawmakers about the potential negative effects of any sweeping regulatory changes in the banking landscape, particularly on the issue of consumer protection.

"What we would urge our regulators and legislators to do is proceed with clarity and purpose and avoid penalizing all firms alike -- regardless of whether they were reckless or prudent," Dimon said in his letter after extensively outlining which proposals the firm supports and which it doesn't.

It will be interesting to see if Dimon, who has recently taken more of a backseat on earnings conference calls, will use some portion of the hour to further this cause.

--Written by Laurie Kulikowski in New York.