Will JPMorgan Chase call the turn in the banking sector tomorrow morning?

04/13/2010 12:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

For the next couple of days, at least, Jamie Dimon, CEO at JPMorgan Chase (JPM), is the most important figure in the U.S. financial industry.

JPMorgan Chase reports earnings tomorrow, April 14, before the stock market opens. The consensus among Wall Street analysts is looking for earnings of 60 cents a share for the company’s first quarter. That would be a 50% increase from the 40% earned in the first quarter of 2009.

Wall Street, of course, hopes that JPMorgan Chase beats that forecast. Although Wall Street isn’t especially optimistic that will happen. Earnings estimates have been coming down for the stock for the last three months.

But what Wall Street wants, even more than a one-quarter earnings surprise, is to hear CEO Dimon say that the bank has stopped adding to reserves against bad loans. Second best would be a modest add to reserves and a few words predicting an end to a need to add reserves in the next quarter or two.

That’s because any additions to reserves come straight out of a bank’s earnings.

So for example, in the first quarter of 2009 the company’s earnings of $2.1 billion would have been much higher except that JPMorgan Chase had to add $4.2 billion in reserves for bad loans, mostly in its consumer credit card business.

By the fourth quarter additions to credit card reserves were down to $1.9 billion and earnings were up to $3.3 billion.

Whenever JPMorgan Chase stops adding to credit loss reserves, investors can expect to see to big boost to earnings. (Dividend increases wouldn't be far behind as banks moved to restore some of the dividend payments they cut in the financial crisis.)

And this isn’t true of just JPMorgan Chase. The same is true across the banking sector. The rally in financial shares has been built on the turn in earnings that will come when banks stop needing to throw billions into their credit loss reserves.

What investors with some impatience want to know is when this turn will arrive. As the big bank that escaped the financial crisis with the least damage, JPMorgan Chase is widely expected to be the first bank to report an end to additions to reserves. Other banks can be expected to follow in JPMorgan’s wake with the delay of a quarter or two. But a turn at JPMorgan Chase would mean the turn for the whole sector is at hand.

That’s why every investor who owns bank stocks—and I’ve got two, HSBC (HBC) and US Bancorp (USB), in Jubak’s Picks now—or who is thinking about buying back into the sector wants to hear what Jamie Dimon says tomorrow.

You can sign in for a live Webcast of the JPMorgan Chase conference call at 9 a.m. tomorrow at http://investor.shareholder.com/jpmorganchase/eventdetail.cfm?eventid=79413

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