Although he believes “this event is largely isolated to JPMorgan and its internal controls,” Miller said the announcement would “certainly be fodder for the Washington, D.C., crowd pushing for the Volcker rule and will certainly increase the headline risk for JPMorgan and the industry.”
The political reaction against banks and their hedging activities began Thursday, with a press release from Sen. Carl Levin (D., Mich.), who said that “the enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” and that “today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets.”
Miller said that “while JPMorgan’s core business lines remain strong and intact, we worry about the potential risk the credit derivatives portfolio poses to earnings going forward,” and that “the company could hold off on repurchasing shares in the near term while it gains a better understanding of potential losses as a result of this portfolio.”
The analyst therefore believes “that there are better names to own in the near-term such as Wells Fargo, U.S. Bancorp, PNC Financial Services Group, and Morgan Stanley, all of which FBR rates outperform.
Shares of Wells Fargo closed at $33.19 Thursday, returning 22 percent year-to-date. Based on a 22-cent quarterly payout, the shares have a dividend yield of 2.65 percent. The shares trade for 1.9 times tangible book value, according to Worldscope data provided by Thomson Reuters, and for nine times the consensus 2013 earnings ratio of $3.68 a share, among analysts polled by Thomson Reuters. The consensus 2012 earnings per share estimate is $3.28. Miller’s price target for the shares is $39
Shares of U.S. Bancorp closed at $31.91 Thursday, returning 19 percent year to date. Based on a quarterly payout of 19.5 cents, the shares have a 2.44 percent dividend yield. The shares trade for three times tangible book value, and for nine times the consensus 2013 earnings per share estimate of $3.01. The consensus 2012 earnings per share estimate is $2.77. Miller’s price target for the shares is $36.
Shares of PNC closed at $65.53 Thursday, returning 15 percent year to date. Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.44 percent. The shares trade for 1.4 times tangible book value, and for 9.5 times the consensus 2013 earnings per share estimate of $6.89. The consensus 2012 earnings per share estimate is $6.19. Miller’s price target for the shares is $68.
Shares of Morgan Stanley closed at $15.60 Thursday, returning 4 percent year to date. Based on a quarterly payout of a nickel, the shares have a 1.28 percent dividend yield. The shares trade for just 0.6 times their reported March 31 tangible book value of $27.37, and for 6.5 times the consensus 2013 earnings per share estimate of $2.42. The consensus 2012 earnings per share estimate is $1.43. FBR analyt Stephen Stelmach’s price target for Morgan Stanley’s shares is $30.
Miller lowered his second-quarter earnings estimate for JPMorgan to 93 cents a share from $1.20, while lowering his full-year estimate for 2012 to $4.42 from $4.83. The analyst also lowered his “FY13E GAAP EPS from $5.70 to $5.55 and operating EPS from $5.80 to $5.65 due to lower buybacks in FY12.”
—By Philip van Doorn, Bank Analyst, TheStreet.com
Additional News: JPMorgan Loss Slams Bank Stocks—and Dimon’s Image
Additional Views: Pimco’s Gross: JPMorgan ‘One of the Best-Run Banks’
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