JPMorgan CFO Change Helps Put Whale in Rear View
It's full steam ahead for JPMorgan Chase, as the company puts its hedge trading debacle further behind it and investors look ahead to a further return of capital.
JPMorgan Chase on Monday announced that Marianne Lake would take over from Douglas Braunstein as the company's new chief financial officer in January, and would join the company's Operating Committee, reporting to CEO James Dimon. Lake currently serves as the CFO for JPMorgan Chase's consumer and community Banking unit.
Braunstein will be moved upstairs, becoming a vice chairman of the company, to "focus on serving top clients of the firm — drawing on his years of expertise and experience in key client coverage roles in our investment bank."
UBS analyst Brennan Hawken on Monday said that Lake's appointment was "largely expected," and that her membership in the Operating Committee "restores the prior reporting structure for JPM's CFO, which was adjusted this summer in the wake of the CIO trading loss."
Hawken added that "although the firm has indicated Mr. Braunstein stepping down was not related to the whale trade, we expect some investors may view this as another step in putting that issue to rest."
CIO refers to JPMorgan's Chief Investment Office, responsible for the now infamous "London Whale" hedge trade, which led to $4.4 billion in trading losses during the second quarter, as the company worked to unwind a very large hedge position. The company still managed to earn $5 billion during the second quarter, with earnings increasing to $5.7 billion in the third quarter.
Following the completion of the last round of Federal Reserve stress tests in March, JPMorgan raised its quarterly dividend by a nickel to 30 cents a share, and its board of directors authorized a new share repurchase plan, with the Fed approving $12 billion in buybacks for 2012, followed by another $3 billion in buybacks for the first quarter of 2013. After Dimon in May first announced the hedge trading problem and provided a preliminary loss estimate, the company suspended its $15 billion share repurchase program, after buying back just $1.6 billion worth of shares.
The company reported on Nov. 8 that after submitting a revised capital plan to the Federal Reserve, the company was approved to buy back up to $3 billion in shares during the first quarter of 2013.
Hawken's "buy" rating for JPMorgan Chase was unchanged, along with his price target of $46, which represents 13 percent upside to the closing price on Monday of $40.59.
After the Federal Reserve released the economic scenarios it would use for its next round of stress tests to be completed in March 2013, KBW analyst Frederick Cannon estimated that JPMorgan would increase the quarterly dividend by 10 cents to 40 cents, while buying back a total of $12.4 billion in common shares during 2013. This would be quite a significant capital return, especially in light of the company's efforts to improve its risk management this year.
JPMorgan already has an attractive dividend yield of 2.96 percent based on the 30 cent dividend. If Canon's estimate proves to be accurate, the dividend yield would be 3.94 percent, based on Monday's closing price. That is quite a significant bit of income for yield-hungry investors in the prolonged low-rate environment.
Preventing Another 'London Whale'
Citigroup analyst Keith Horowitz on Tuesday, following a meeting with the company's new Co-Chief Operating Officer and Operating Committee member Matthew Zames, said that "one clear takeaway from the meeting is investors remain concerned about risk [management] and lack the ability to 'trust' [that] JPM is not harboring other unseen risks."
According to Horowitz, "Zames emphasized JPM's renewed commitment to 'empower' independent risk managers in the CIO, increase transparency, and hold the corporate segment to more rigorous standards that have long been in place in the Investment Bank." Horowitz said that his firm believed that "the failure in the CIO was simply an oversight due to lack of focus," and that although it was "a painful and costly mistake, lessons have been learned, processes have been rectified, and the CIO operation will be very differently managed going forward."
"Despite the large size of JPM's balance sheet, we believe [management] has their arms around key risks, and ironically after this issue now have greater confidence in JPM relative to peers," Horowitz said.
He continues to rate JPMorgan a "buy," with a $48 price target.
JPMorgan's shares have now returned about 20 percent year-to-date, following a 20 percent decline in 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $5.70.
—By TheStreet.com's Philip van Doorn
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