JPMorgan Down on '$9 Billion' Loss Estimate (Update 1)

Updated with current market information and reaction from Wells Fargo analyst Matthew Burnell.

NEW YORK ( TheStreet) -- Shares of JPMorgan Chase ( JPM) were down 5% in afternoon trading on Thursday to $35.10, after the New York Times reported that the company's hedge trading losses could reach as high as $9 billion.

JPMorgan CEO James Dimon announced the company's Chief Investment Office's trading losses after the market close on May 10, estimating "slightly more than $2 billion" for the second quarter. With the company having already "out of more than half the trade," the company has projected losses, "assuming worst case conditions," of between $8 and $9 billion, according to the Times, citing an unnamed source who reviewed an internal company report.
JPMorgan CEO James Dimon

The Times also said that with "much of the most volatile slice of the position sold," regulators are "unsure how deep the reported losses will eventually be, with some expecting ultimate losses of between $6 billion and $7 billion.

Dimon said on May 21, following his announcement that JPMorgan Chase was suspending its share repurchase program, that he expected the company to be "solidly profitable" for the second quarter.

JPMorgan Chase's shares closed at $36.78 Wednesday, returning 12% year-to-date, following a 20% decline in 2011. The shares were down 10% since closing at $40.74 on May 10, before Dimon disclosed the trading losses, recovering from a closing low of $31.00 on June 4.

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Based on a 30-cent quarterly payout, the shares have a dividend yield of 3.26%.

At Wednesday's close, the shares traded just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.34.

Stifel Nicolaus analyst Christopher Mutascio has a "Hold" rating on JPMorgan Chase, and said on Thursday morning that he has "no idea if the $9 billion figure reported in the article is accurate," but if that loss figure "is spread out over a few quarters, then the company could still remain profitable on a quarterly basis," since the firm has "posted net income ranging from $3.5-$5.0 billion (after preferred dividends)."

The analyst went on to say that "if the company is solidly profitable in 2Q12 and the $9 billion figure is accurate and absorbed in one quarter, then it suggests to us that the company is harvesting a substantial amount of the previously disclosed $8+ billion in unrealized investment securities gains to at least partially offset the losses from the unwind of the hedge."

Mutascio thinks that "the real focal point for 2Q12 earnings should be net interest income," and not the trading losses, since proceeds from a large sale of investment securities to harvest unrealized gains would have to be reinvested at the lower rates prevailing in the market. Therefore, "the bigger long-term risk (more permanent risk) to earnings at JPM is not the losses from the unwind of the hedge - rather, it could be the potential reduction in net interest income levels from de-risking the CIO investments into low yielding securities/assets."

Wells Fargo analyst Mathew Burnell later on Thursday said that although his firm was â¿¿not revising our $5B CIO loss estimate at this time, we estimate that every incremental $1B in losses would reduce our EPS estimate by $0.18 assuming a 30% effective tax rate and no offsetting actions (such as the realization of portfolio gains).

While Burnell left his 98-cent second-quarter earnings estimate for JPMorgan unchanged, he also said that ⿿the incorporation of larger CIO loss assumptions and weaker capital market forecasts may result in further EPS reductions, potentially weighing on share price performance.⿝ The analyst still views the company⿿s July 13 earnings announcement ⿿as a positive catalyst assuming management is able to quell investor concerns around the CIO risk management lapse.⿝

Burnell maintained his ⿿Buy⿝ rating on JPMorgan, with a valuation range of $40 to $42, saying ⿿we would recommend utilizing near-term weakness to increase JPM exposure, which we continue to view as best-in-breed within the universal commercial banks despite recent CIO-related challenges.⿝

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

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

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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.