Saturday, July 18, 2009

A Stellar Report From JPM

JPMorgan announced a blockbuster second quarter result. It triumphs seven times over analysts' estimates. The Street was looking for earnings of 7 cents per share but JPM reported 28 cents of profit, after accounting for one-time charges relating to repayment of the TARP program of 27 cents and another 10 cents relating to a special assessment fee paid to the FDIC.

  • $2.7 billion in reported earnings before payment for preferred shares and charges related to repayment of TARP money.
  • Earnings due to common shareholder is $1.1 billion.
  • Quarter reported earnings is impacted by a special assessment fee to the FDIC of $419 million (after tax) or $675 million (before tax). Excluding this, the reported earnings would be $3.1 billion.
  • Pretax preprovision income (PPI) is $14.2B on a managed basis or $12.1 on a reported basis - a record for JPM.
  • If annualized, the potential PPI could be ranging from $45 to $50 billion. Assuming credit quality gets much worse, the PPI can potentially covers for up to 7.3% of its loan portfolio of $681 billion, without eating into capital, not forgetting tax benefit for losses incurred would reduce the impact.
  • $1.7 billion loss reserve built, thus, loss allowance for loan losses is $29 billion, up from prior quarter of $27.3 billion.
  • The $29B allowance covers almost 4.3% of its total loan portfolio.
  • Nonperforming loan increased 30% from Q1 to $14.8 billion. In other words, 2.17% of its total loan is nonperforming.
  • However, the $29B allowance for loan losses covers 1.98 times of the nonperforming loan.
  • Market capitalization is $145 billion. Stock selling at roughly 3 times earnings before provision and tax.
  • If and when market returns to normal, the normalized earnings would spike because delinquency would decline. With an PPI earning power of $45 billion, and say 30% of it needs to be provided for loan losses, the earning would be $31.5 billion. At a tax rate of 35% (but likely to be increased due to the huge budget deficit and the appetite for healthcare reforms), the net income is $20.5B. Applying a multiple of 10, the business is worth $205 billion.
  • Even with the assumption of 30% of provision for loan losses, it translates to $13.5B, accounting for almost 2% of the loan portfolio ($681B). A relatively high number for even a normal economy.
BAC and Citi reported earnings yesterday but Citi does not seems to be out of the woods. I think BAC will be fine although BAC relies on an usually high percentage of their revenue on the non-interest businesses. Wells Fargo will report on Tuesday. I think they will stand out for their earning power, though loan losses are expected to be on the rise, no doubt. Let's wait.


Daniel M. Ryan said...

If JPM restored its dividend at the old 38 cent per quarter rate, it would yield more than 4% using Friday's close.

It is a good turnaround pick. Its 10-year average earnings was $2.51, making for a P/E of 14.7 using those earnings. The last time JPM's earnings got into a spot, it took two years for them to recover. The fact that its earnings were beaten down by one-time charges in 2Q suggests that the same pattern will emerge in 2008 and '09. JPM's earning should recover in '10.

Penny Stocks said...

Now what have we here Jp Morgan chase was that not one of those major money center banks that received money from uncle sam.