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.

INCOME & REVENUE

• $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.

CREDIT QUALITY

• $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.

VALUATION

• 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.