5 Things to Watch for in JPMorgan Chase Earnings

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) CEO Jamie Dimon will be looking to put the story of of the "London Whale" trading loss to rest when the bank reports its third quarter earnings on Friday, but that's not the only issue.

The bank took the bulk of the hit for the failed hedging strategy in the second quarter and the stock has significantly recovered since the first announcement of the debacle.

But Dimon will still have to convince investors that JPMorgan's troubles are behind it, amid fresh legal battles and ongoing economic uncertainty.

Analysts expect the country's largest bank to report an earnings per share of $1.21 on revenues of $24.531 billion, according to consensus estimates available on Thomson Reuters.

As Barclays Capital analyst Jason Goldberg notes, JPMorgan has outpaced street expectations in 16 out of 17 quarters, so the bar will be predictably high.

The results are likely to be skewed by one-off items including accounting losses (DVA) stemming from the rising market value of the bank's debt and charges from the continuing unwinding of synthetic credit positions that cost the bank dearly this year.

But excluding the noise, analysts expect the bank to report a significantly better third quarter relative to the previous year.

Capital markets revenue is likely to have rebound sharply from a year ago when U.S. sovereign debt was downgraded for the first time, wrecking the markets. Mortgage banking revenue is expected to be solid as well, thanks to the refinancing boom.

Pressure on interest margins and elevated legal and other expenses are likely to be the key negatives in the quarter, though those might be issues that affect all of the big banks.

Here's five things that investors will be watching out for when the bank reports Friday.

Does Schneiderman Have a Case? Last week, New York Attorney General Eric Schneiderman fired his first salvo as the co-chair of the Residential Mortgage-Backed Securities Working Group, filing a lawsuit against JPMorgan for allegedly fraudulent misrepresentations made by its Bear Stearns unit in the sale of mortgage backed securities. This was of course prior to the bank's acquisition of Bear Stearns in 2008.

The complaint alleged that Bear Stearns failed to evaluate the quality of the mortgage loans packaged into mortgage backed securities costing investors $22.5 billion in losses to date.

The complaint, however, does not mention damages sought. JPMorgan has said it would fight the charges.

The issue is likely to be front and center at the analyst conference call.

Speaking at the Council for Foreign Relations on Wednesday, Dimon said that the Bear Stearns acquisition has cost the bank $5 billion to $10 billion in various expenses till date. He said that the bank did the Fed a "favor" when it took over Bear Stearns in 2008 and argued that it was "unfair" that regulators were coming after them now.

"I'm a big boy. I'll survive...But I think the government should think twice before they punish business every single time things go wrong," Dimon said, according to a Reuters report .

Mortgage Putback Risks: Investors continue to demand that banks repurchase souring mortgage backed securities sold during the boom, alleging that banks misrepresented the quality of the underlying loans that were pooled into the securities.

JPMorgan has maintained that claimants face significant hurdles in litigation given that their disclosures were clear and investors were sophisticated.

Still, as The Street's Philip Van Doorn reports, JPMorgan faces significant putback risk . The company reported that as of June 30, there was $149 billion remaining in mortgage loans securitized from 2005 to 2008, and $47 billion of that total was past due 60 days or more, with $16 billion of the problem loans originated by Washington Mutual. JPM said that its "recognized mortgage repurchase liability" as of June 30 was $3.3 billion, declining from $3.6 billion as of Dec. 31."

Is the Whale Now a Small Fish?: Analysts will look for an update on the winding down of the ill-fated derivative trades by a trader nicknamed the London Whale. JPMorgan has so far booked $5.8 billion in losses in the first half of the year.

The bank has said that it is possible that a portion of the positions transferred to the investment bank could suffer additional losses between $800 million and $1.7 billion under "extreme" simulated scenarios.

When Will You Resume Share Buybacks: JPMorgan was forced to suspend its $15 billion buyback program in the wake of the trading fiasco in May. But following the second quarter results, the bank said it hopes to be in a position to resume buybacks in 2013.

Stifel Nicolaus analyst Chris Mutascio believes that the firm's trading fiasco may still have some impact on the Fed's approval of its buyback.

"We believe there is a human element that goes into the CCAR process and there may be at least some amount of risk that the regulators look at the London trading issue, which occurred just weeks after JPM was approved for $16.4 billion in capital deployment actions (dividends and buy backs), when determining how much overall capital deployment they will allow in 2013," wrote Mutascio in a report Wednesday.

Analysts expect the bank to finish the third quarter with a Basel III Tier One Capital of 8.3%.

Merrill Lynch analyst Erika Penala said in a report Tuesday that the bank is well positioned to return $15 billion in 2013 following the stress tests.

Housing Recovery and Mortgage Banking: The Fed's third round of quantitative easing and encouraging signs of a recovery in housing have helped bank stocks rally in the third quarter.

Merrill Lynch's Penala believes the market is underestimating how much JPMorgan can gain from a recovery in housing.

"We believe investors are incorrectly overlooking Citigroup and JPMorgan on the housing theme, as both EPS power and market multiples are highly levered to a recovery. With consolidated loan loss reserves at 4.4% of loans for C and 3.3% for JPM versus 2% median of the large cap regional banks, the money centers have significantly more room to release reserves," she wrote in a report. "Improving credit should benefit EPS at C by 19% and JPM by 14% in '13, vs. 6.3% at the median large-cap regional."

The market will be tuning in for Dimon's commentary on whether the housing recovery is real and what it means for the bank in terms of loan growth and credit quality as well as what it means for the economy overall.

--Written by Shanthi Bharatwaj in New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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