JPMorgan Chase will once again kick off the earnings season for banks when it reports third-quarter results Thursday morning.
Expectations are low after the bank’s investment banking chief, Jes Staley, warned investors in early September that markets revenue could post a sequential decline of 30 percent in the third quarter as market volatility spiked.
Investment banking fees are also likely to plunge by nearly 50 percent quarter-on-quarter as deal-making and capital raising activity came to a standstill.
The weak guidance from arguably the healthiest bank in the country set off a raft of earnings downgrades for the rest of the sector. Analysts have aggressively slashed their earnings estimates for universal banks such as JPMorgan , Bank of America and Citigroup as well as broker-dealers like Goldman Sachs and Morgan Stanley.
JPMorgan is now expected to post an earnings per share of 96 cents on revenues of $23.73 billion during the third quarter, according to consensus estimates from Thomson Reuters.
Barclays Capital analyst Jason Goldberg expects continued loan loss reserve releases and higher mortgage re-finance activity to "soften the blow" from trading and investment banking divisions.
Considering that a weak operating performance has been well-telegraphed however, investors and analysts will likely focus on the bank's guidance on future performance during the earnings call. Being the first among the big banks to report, the management is likely to be quizzed on a range of issues including its loan demand outlook, how it plans to manage the low-interest rate environment, mortgage litigation expenses and of course, its exposure to Europe.
"If [JPM] indicates that loan demand was strong and provides more disclosure and comfort regarding European exposures, the stock could trade higher despite the relatively weak revenue quarter that we expect," KBW analysts said in a report Tuesday.
Here are five top questions for JPMorgan CEO Jamie Dimon.
1.What is the outlook for loan growth?
Dimon has usually sounded an upbeat note in recent management conference calls. With the economic outlook turning even more dour in the third quarter, investors will be looking for more guidance on the economy, demand for loans and how the bank expects to navigate a low interest-rate environment.
"Everyone knows this is a bad quarter, that net interest margins are falling, that the balance sheet is tough to grow. We are going to be looking for guidance on how credit looks, how is the balance sheet looking, how will they manage net interest margins, how much legs does all this stuff have," says FBR Capital analyst Paul Miller.
2. What's your "real" exposure to Europe?
Investors are not nearly as worried about JPMorgan's exposure to Europe as they are about Citigroup's or Morgan Stanley's. Still, expect to hear at least some discussion on how the management expects the crisis in Europe to play out.
JPMorgan has said that it has about $15 billion in net exposure to Greece, Italy, Spain, Ireland and Portugal and that the worst-case impact on the bank is $3 billion after tax. The bank says the bulk of its exposure is to corporate bonds and not sovereigns.
"The real impact of failures over there would be on what does it do to the global economy, what does it do to other exposures in Europe, what does it do to, you know, exposures in the United States," Dimon said in the second quarter earnings call. "And you can guess as well as I can. I don't expect it will be a disaster for French and German banks. Obviously there are exposures in France and Germany and elsewhere, but I think those things will probably all be fine."
Given that fears of contagion have only intensified since then, banks are under pressure to disclose more about their exposure to the region both at the "gross" and at the "net" level and to quantify the risk.
3. What's your "best estimate" of mortgage-related losses?
Analysts have thrown up their hands in despair as they try to gauge the losses that could arise from mortgage repurchase claims and lawsuits.
The Federal Housing Finance Authority in early September sued 17 large banks including JPMorgan Chase alleging violations of federal securities laws in the sale of mortgage-backed securities to government-sponsored enterprises, including Fannie Mae and Freddie Mac.
The largest mortgage lenders and servicers could be facing another wave of losses on insurance claim denials by the Federal Housing Administration, or FHA, according to FBR Capital Markets. For JPMorgan Chase, FHA claims denials could lead to losses of $1.39 billion as a servicer and $1.42 billion as a lender, according to the analysts.
Investors are starting to make their peace with the fact that provisions for these losses will stay elevated for some time to come and that banks will find partial offsets through expense reductions.
But it also means that forward earnings estimates have a high margin of error.
4. Is the Volcker rule anti-capitalism?
You can't talk to Jamie Dimon and not expect to get a view on regulation. He has been the chief critic of international regulatory capital standards, arguing that they will restrict lending and hurt the economy.
In recent months, he has gone so far as to call the additional capital buffers for too-big-to-fail institutions as "anti-American."
Analysts are sure to get Dimon's thoughts on the Volcker rule, a draft of which was released officially on Tuesday by the Federal Reserve .
The draft suggests that investment banks will have to go through a high level of monitoring and compliance in order to conduct permitted market-making activities. Some expect the rules, if implemented, to have a big impact on fixed income trading.
5. Can we expect more dividends/buybacks?
JPMorgan said in its earnings conference call last quarter that it expects to be generating a lot of extra capital over the next 12 months and that it would look to return more money to shareholders, pending regulatory approval.
The bank announced a $8 billion buyback program earlier this year and repurchased $3.6 billion in stock in the first half. Sandler O'Neill analyst Jeff Harte, expects the bank to utilize the full $8 billion of stock repurchases for 2011, based on his meeting with the management.
While the management appears willing to pay out more in dividends or step up buybacks, however, investors might have to be more patient as the bank awaits regulatory approval.
The Federal Reserve is taking a cautious stance with U.S. banks that have approached it in recent weeks for permission to buy back more of their shares, according to a recent Wall Street Journal report. Given the heightened uncertainty, the Fed wants banks to build more capital cushion before stepping up dividends or buybacks, the report said.
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