Although JPMorgan Chase (NYSE: JPM) has been able to navigate the turbulent times since the 2008 financial crisis generally looking good, the London Whale debacle and recent financial results seem to be weighing on the firm.
Today, the stock endured a tumultuous session following an early morning downgrade from Deutsche Bank analyst Matt O’Connor. O’Connor noted that analysts appear to be overestimating the bank’s earnings power in the near term, so downgraded the stock to Hold from Buy. O’Connor listed three main concerns about the stock:
1.Earnings Per Share expectations may be too high (our 2013 estimate is 3% below consensus and we have a downward bias to our estimate)
2.Capital deployment may disappoint (we think Fed approval for meaningful buybacks in 4Q12/1Q13 is unlikely) and
3.Regulatory/legal matters (such as LIBOR, VAR model changes, CIO loss disclosures, etc) remain uncertain. Given these and a 19% rise in the stock off recent lows, we think the risk/reward is less compelling.
CEO Jamie Dimon has come under fire for the London trading losses, though the firm has continued to outperform its peer group of bulge bracket banks. While JPM shares are down 9% since the second quarter earnings announcements that is less than the 11% for Citigroup (NYSE: C), and about 5% for Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). JPM has outperformed other banks in the past five years on numerous metrics, but competitors have boosted their capital positions and can now focus more on growth. That implies JPM’s lead will narrow.
JPMorgan has long benefitted from appearing far less risky and better controlled than their peers, though that assumption is now waning. O’Connor noted that “Risks at most peers no longer seem to be outsized vs. those at JPM, liquidity and capital differences have narrowed and certain peers seem ready to be more aggressive in maintaining/gaining market share. We believe this implies additional market share gains for JPM will be less likely and may suggest some share loss in certain areas (such as capital markets, following huge gains in recent years).”
JPMorgan has recently announced management changes aimed at creating a clear successor to Dimon – while his job does not appear in jeopardy for now, another scandal can thrust that question into the spotlight. The stock will likely continue to be battered until these trading losses are completely realized and market sentiment changes on the firm – for now, the firm will likely see their stock follow the path of their rivals…down.