JPMorgan: 'Whale' Loss Winner (Update 1)

Updated with market close information.

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) was the winner among the largest U.S. financial names on Friday, with shares rising 6% to close at $36.07.

The Dow Jones Industrial Average rose over 200 points, after JPMorgan reported a second-quarter profit of $5 billion, or $1.21 a share, soundly beating the consensus estimate of a 72-cent profit, among analysts polled by Thomson Reuters.

The KBW Bank Index ( I:BKX) rose over 3% to close at 45.91, with all 24 index showing gains of at least 2%.

JPMorgan CEO James Dimon had in May estimated that the second-quarter hedge trading loss by its Chief investment Office (CIO) estimated at would be "slightly more than $2 billion." The trading losses for the second quarter in fact totaled $4.4 billion, and the company also said it would restate its first-quarter earnings by $459 million, but investors cheered several positive developments:
  • Mortgage revenue increased to $2.3 billion during the second quarter, from $2.0 billion during the first quarter, and $1.1 billion in the second quarter of 2011.
  • Total noninterest expense declined to $15.0 billion in the second quarter, from $18.3 billion the previous quarter, and $16.8 billion a year earlier, mainly reflecting a decline in litigation expenses, but also a reduction in compensation expenses to $7.4 billion, from $8.6 billion in the first quarter (the annual seasonal spike for bonuses), and $7.6 billion in the second quarter of 2011.
  • Period-end commercial banking loans grew to $120.5 billion as of June 30, from $115.8 billion the previous quarter, and $102.7 billion a year earlier.

The second-quarter bottom line was boosted by a $2.1 billion release of loan loss reserves, representing 33 cents a share, after tax, and $0.8 billion, or 12 cents a share, after tax, in debit valuation adjustments (DVA).

Dimon said during JPMorgan Chase's earnings conference call that "we've significantly reduced the total synthetic credit risk in CIO," and that "hopefully, if all goes well, we can start buying back stock early in the fourth quarter," resuming the share buyback program that was suspended in May after the CIO hedge trading losses were first disclosed.

Dimon said the company could "can get to 9% Basel III Tier 1 common equity ratio by the end of 2013 and buy back $23 billion, we can get to 9.5% and buy $15 billion. So clearly, we have the ability."

JPMorgan's shares have now returned 11% year-to-date, following a 20% decline in 2011. Based on a 30-cent quarterly payout, the shares have a dividend yield of 3.33%.

JPM Chart JPM data by YCharts

The shares trade for seven times the consensus 2013 EPS estimate of $5.28. The consensus 2012 EPS estimate is $4.19.

Stifel Nicolaus analyst Christopher Mutascio rates JPMorgan a "Hold," and said on Friday that after backing out the one-time items during a quarter with "significant noise," he "could arrive at a core quarterly EPS run-rate in the $1.35 range."

The analyst said that "areas in which the company clearly beat our expectations were: 1) mortgage banking income came in at $2.27 billion versus our estimate of just $1.61 billion, and 2) operating expense were $14.97 billion versus our estimate of $15.55 billion," combining "for a $1 billion beat, or $0.17 per share, relative to our expectations."

Mutascio's areas of concern include "1) the company's net interest income came in at $11.15 billion, which is down from the 1Q12 level of $11.67 billion and lower than our $11.84 billion estimate - with the net interest margin falling to 2.47% from 2.61% in 1Q12, and 2) the company's estimated Basel III tier 1 common capital ratio was 7.9%, down from the originally reported 1Q12 level of 8.4% and the restated 1Q12 level of 8.2%."

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

Wells Fargo ( WFC) on Friday morning reported a second-quarter profit of $4.6 billion, or 82 cents a share, beating the consensus estimate by a penny.

Earnings increased from $4.2 billion, or 75 cents a share, in the first quarter, and $3.9 billion, or 70 cents a share, in the second quarter of 2011.

The shares rose over 3% to close at $33.91.

Total loans in the company's "core" loan portfolio grew to $672.11 billion as of June 30, from $658.3 billion the previous quarter. Wells Fargo's net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- held steady from the previous quarter, at 3.91%, although the margin was down from 4.01% a year earlier.

Wells Fargo reported a second-quarter return on average assets of 1.41%, increasing from an already strong 1.31% the previous quarter, and 1.27% a year earlier.

The company reported that its noninterest expenses declined to $12.4 billion during the second quarter, from a seasonally high $13.0 billion in the second quarter, and $12.5 billion in the second quarter of 2011. The company's second quarter efficiency ratio improved to 58.2 from 60.1 the previous quarter, and 61.2 a year earlier. The efficiency ratio is, essentially, the number of pennies of expenses it incurs for each dollar of revenue generated.

Wells Fargo during the second quarter "purchased approximately 53 million shares of its common stock and an additional estimated 11 million shares through a forward repurchase transaction expected to settle in third quarter 2012."

Wells Fargo's shares have now returned 24% year-to-date, following a 10% decline during 2011.

WFC Chart WFC data by YCharts

The shares trade for nine times the consensus 2013 EPS estimate of $3.65. The consensus 2012 EPS estimate is $3.28.

Based on a quarterly dividend of 22 cents, Wells Fargo's shares have a dividend yield of 2.60%.

Bank of America Merrill Lynch analyst Erika Penala rates Wells Fargo a "Buy," with a price objective of $36, and said on Friday that for the second quarter, "the biggest surprise was certainly the resilience of WFC's lending margin, which at 3.91% was flat sequentially," and that "as a result, net interest income of $11.2bn beat our $10.9bn estimate."

The analyst also said that Wells Fargo's $1.8 billion second-quarter provision for loan losses "was also lighter than expected ($1.8bn vs $2.0bn est.) as credit trends continued to improve."

Penala added that "while it is clear that WFC continues to hit on most cylinders, bears may pick at 'non-recurring' levels of support to the margin, as well as the increased guidance on quarterly expenses," and that she "would see any weakness today as an enhanced Buying opportunity, as we don't think consensus EPS are in danger of material revisions down."

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

Investors eyes now turn to Citigroup ( C), which will report its second-quarter results on Monday, with the consensus among analysts being a profit of 89 cents a share, declining from EPS $1.11 in the first quarter, and $1.09 in the second quarter of 2011.

Citi's shares rose over 5% on Friday, to close at $26.65.

Credit Suisse analyst Moshe Orenbuch rates Citigroup "Outperform," with a $48 price target, and said on July 2 estimated the company would report second-quarter operating earnings of 96 cents a share, excluding one-time items, such as DVA and "an after-tax loss of $243mm ($0.08/shr) related to the sale of a 10.1% equity interest in Akbank."

Orenbuch forecasts "core Securities and Banking revenues of $4.9Bn down 27% q/q and down 9% y/y given weaker market activity," along with a decline in core trading revenue to "$3.5Bn (down 38% q/q and 5% y/y)," excluding credit valuation adjustment (CVA) gains. The analyst also expects "$765mm investment banking fees; down 12% q/q given weaker debt underwriting and advisory activity."

Citi's shares have now returned 1% year-to-date, following a 44% decline in 2011.

C Chart C data by YCharts

The shares trade for just over half their reported March 31 tangible book value of $50.90, and six times the consensus 2013 EPS estimate of $4.54. The consensus EPS estimate for all of 2012 is $3.93.

Orenbuch is out in front of the consensus, estimating that Citigroup will earn $4.20 a share for all of 2012, followed by 2013 EPS of five dollars.

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

Bank of America ( BAC) will announced its second-quarter results on Tuesday, with analysts expecting a profit of 14 cents a share, improving from three cents in the first quarter, and a 90-cent loss in the second quarter of 2011, when the company entered into an $8.5 billion mortgage putback settlement with private investors.

The shares were rose 5% on Friday, to close at $7.82.

In the wake of JPMorgan Chase's second-quarter earnings announcement, KBW analyst Fred Cannon said on Friday that he felt "better about BAC's potential mortgage results after seeing JPM's strong 14% q/q volume growth and the strong margins that remained," and that "while BAC has been losing market share in the mortgage origination business of late, we still view this as a positive indicator and believe that BAC could beat our $1.9B mortgage banking revenue estimate by as much as $300-$400 million and rebound towards 4Q11 results."

Cannon stuck with his second-quarter EPS estimate of 23 cents for Bank of America, which "nets down to about $0.18 excluding an ineffective hedge that should negatively impact the net interest margin ."

Since "Investment Banking revenues at JPM were down slightly (~8%), while income rose in the quarter," Cannon said that KBW was "forecasting for a 10% decline in BAC's Investment Banking revenue and now feel more confident about these estimates." The analyst added that "we do feel that based on JPM's trading results that BAC could show some slight upside to our $3B estimate for the quarter," and also said that while his firm had predicted a decline in trading income of over 45% for Bank of America, "JPM's decline of only 30% lead us to believe that BAC could show similarly resilient trading income levels."

Bank of America's have now returned 41% year-to-date, after dropping 58% during 2011.

BAC Chart BAC data by YCharts

The shares trade for 0.6 times their reported March 31 tangible book value of $12.87, and for eight times the consensus 2013 EPS estimate of 96 cents. The consensus 2012 EPS estimate is 57 cents.

Interested in more on Bank of America? 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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