Dimon's Political Victory Rings Hollow for Shareholders: FBR

NEW YORK ( TheStreet) -- FBR analyst Paul Miller said on Thursday that JPMorgan Chase ( JPM) CEO James Dimon's "political victory" on Wednesday was not enough to lift the company's shares out of their current trading range.

Dimon on Wednesday testified before the Senate Banking Committee, saying that JPMorgan would be " solidly profitable" for the second quarter, while not providing an updated figure for the company's hedge trading losses, previously estimated to be $2 billion.

The CEO said he was sorry that after being instructed to "reduce risk-weighted assets and associated risk" in its hedging portfolio -- in anticipation of new Basel capital requirements -- the firm's Chief Investment Office (CIO) "embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones," leading to the losses, rather than simply reducing existing positions.

Miller said that "members of the Senate Banking Committee largely avoided tough or uncomfortable questions," and "on the rare occasion when a well-written question was asked, Dimon was good at deflecting a direct answer, and senators did not press for a full response nor did they have a relevant follow-up question."

Republicans on the Committee also used their questions to attack the Dodd-Frank banking reform legislation and the Volcker rule," which Miller said "maintains Republicans' ability to make changes to Dodd-Frank post the election."

Miller said that there were still "fundamental questions about the impact of the trading loss and visibility into the bank's true earnings power without a fully operational investment office," and that "Mr. Dimon failed to answer repeated questions relating to why the CIO moved to a different value-at-risk (VAR) model and its failure to disclose the move even when there was a significant change."

JPMorgan's shares closed at $34.30 Wednesday, returning 5% year-to-date, following a 20% decline during 2011. The shares have declined 16% since closing at $40.74 on May 10, just before Dimon disclosed the second-quarter trading losses.

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The shares trade just below their reported March 31 tangible book value of $34.91, and for six times the consensus 2013 EPS estimate of $5.33, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.33.

Miller rates the shares "Market Perform," with a $37 price target, estimating JPMorgan Chase will report GAAP earnings $4.05 a share this year, followed by EPS of $5.18 in 2013. His operating EPS estimates are $5.00 for 2012 and $5.27 for 2013.

The analyst said "there is no doubt that JPMorgan remains a strong, well-capitalized bank," but that "the true earnings power of the company has become unclear." Prior to the CIO loss, "many investors were even expecting the bank to earn upwards of $7.00 in FY14," he said, adding "now, we wonder whether the company can still produce those earnings as we still do not know how much the CIO contributed to overall profitability over the last few years."

On a positive note, Miller said that "JPMorgan is the best positioned out of the big four" U.S. banks -- also including Bank of America ( BAC), Citigroup ( C), and Wells Fargo ( WFC) -- "to take advantage of dislocation in the market, but in the end, it may struggle to truly grow its balance sheet in a weak economic environment."

Looking at the other "big four" club members, JPMorgan Chase trades lower to forward earnings estimates than two of the other banks, but also at a higher multiple to book value than two of the others:
  • Citigroup closed at $27.67 Wednesday, returning 5% year-to-date, following a 44% decline last year. The shares trade for just over half their reported March 31 tangible book value of $50.90, and for six times the consensus 2013 EPS estimate of $4.63. The consensus 2012 EPS estimate is $4.12.
  • Shares of Bank of America closed at $7.50 Wednesday, returning 35% year-to-date, after dropping 58% in 2011. The shares trade for just 0.6 times their reported March 31 tangible book value of $12.87, and for 7.5 times the consensus 2012 EPS estimate of $1.01. The consensus 2012 EPS estimate is 59 cents.
  • As the strongest earner among the big four -- with returns on average assets ranging from 1.21% to 1.30% over the past five quarters, according to Thomson Reuters Bank Insight -- Wells Fargo trades the highest relative to tangible book value and earnings estimates. The shares closed at $31.58 Wednesday, returning 16% year-to-date, following last year's 10% decline, and trade for 1.9 times tangible book value, and for nine times the consensus 2013 EPS estimate of $3.67. The consensus 2012 EPS estimate for Wells Fargo is $3.27.

Miller concluded by saying JPMorgan Chase's "stock should trade closer to tangible book value given the uncertainty surrounding JPMorgan's earnings as the company unwinds the credit derivative portfolio and the CIO's office ceases to be fully operational."

Interested in more JPMorgan Chase? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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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