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JPMorgan Looks Good, But Who Wants to Buy Banks?
10/13/2011 3:07 pm EST
The market isn’t going to cut even the strongest banks any slack—or look beyond the current quarter.
That’s the message in the market’s reaction to JPMorgan Chase’s (JPM) third-quarter earnings report, released before the New York market opened. The bank reported better than expected earnings—on a one-time accounting adjustment—but said revenue grew by just 0.1% from the third quarter of 2010.
As of 2 p.m. New York time, JPMorgan Chase shares were down 5.4%.
If you’ve got a perspective of more than a quarter or two, the size of that drop is surprising. The bank reported a 30% jump in deposits and said, basically, that it was swimming in liquidity.
Those aren’t bad things to have going for you when most of the world’s banks are scrambling for capital. JPMorgan Chase is clearly, in the long run, one of the world’s strongest banks, and it should be able to use that strength to pick up business from competitors.
But no one, I’d say, is willing to look that far ahead.
Of course, the current quarter had its share of worries besides the tiny gain in revenue. The bank booked a big $1.9 billion pre-tax gain in the quarter that added 29 cents to the company’s earnings in the period.
Taking out that one-time gain—and one-time losses in the private equity unit and for additional litigation expense—wipes out 5 cents per share of the company’s earnings. Instead of beating by a very impressive 8 cents a share, the bank exceeded Wall Street’s earnings projections by a much more modest 3 cents a share.
It still sounds pretty good, until you notice that adjusted earnings of 97 cents a share is a big 23.6% lower than last quarter’s earnings of $1.27 a share.
All the evidence is that the banking business just isn’t growing right now.
For example, JPMorgan Chase showed a 13% drop in investment-banking revenue from the second quarter. And the damage was spread across this unit. Investment banking fees fell 31%. Revenue from fixed income markets fell 14% (after you subtract accounting events). Equity underwriting fees dropped 47%.
And profitability is certainly a question. The bank’s return on equity fell to 9% in the quarter, from 10% in the third quarter of 2010, and 12% in the second quarter of 2011.
Which isn’t to say there wasn’t any good news. Commercial loans grew by 9% in the quarter. Deposits, as I noted, were up 30%—and deposits are incredibly important right now, when funding operations in the financial markets remain so uncertain.
The bank said its estimated Basel III Tier 1 capital ratio would be 7.7%. Very solid, especially when you consider that raising that ratio to 9%—as may be required of a big bank like JPMorgan Chase when Basel III is finally written—doesn’t look to be much of a struggle for this bank.
After all, the bank bought back $4.4 billion in shares last quarter. That’s cash available to increase the Tier 1 ratio when needed.
It’s hard to know what kind of rating to give these shares now. On the long-term fundamentals, I’d rate the bank a buy. Standard & Poor’s calculates a one-year target price of $52 a share (a tidy gain from today’s $31 price) and Credit Suisse figures the shares will be worth $58 in a year.
On the sentiment though? Forget it.
With Europe’s banks being urged to recapitalize, with talk today that 66 big European banks would fail a new proposed stress test, with Greek default a real possibility, who is buying bank shares today, no matter what the long-term prospects? (JPMorgan Chase said in the conference call today that its exposure to a Greek default is just $3 billion to $5 billion.)
I’d say this averages out to a neutral.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.
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