September 26, 2008 / 9:36 AM / 10 years ago

UPDATE 3-Analysts project Q3 loss for JPMorgan

(Adds Fox-Pitt analyst comments; updates share price)

By Tenzin Pema

BANGALORE, Sept 26 (Reuters) - At least two analysts forecast a third-quarter loss for JPMorgan Chase & Co (JPM.N), citing costs related to its acquisition of Washington Mutual Inc’s (WM.N) banking operations amid challenging credit and capital markets environment.

Credit Suisse analyst Susan Katzke forecast a third-quarter loss of 25 cents a share for JPMorgan, while Goldman Sachs’ William Tanona now sees a quarterly loss of 10 cents a share, compared with his prior estimate of a profit of 40 cents a share.

On Thursday, JPMorgan said it bought the banking assets of Washington Mutual for $1.9 billion, after U.S. authorities closed the top U.S. savings and loan bank, whose market value has been virtually wiped out because of soaring mortgage losses.

JPMorgan said it expects to incur $1.5 billion of pre-tax costs, but will realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately and increase earnings 70 cents per share by 2011.

It also plans to sell $8 billion of stock and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.

“We believe management’s assumptions around merger costs, cost saves and future losses on the mortgage portfolio appear to be realistic and/or achievable,” Goldman’s Tanona said.

Credit Suisse’s Katzke also expressed confidence in the achievability of the acquisition-related cost savings that JPMorgan had forecast, but said she was “less confident in the cost of the current credit and capital markets cycle to the bank’s existing operations.”

Katzke cut her 2008 profit view to $1.65 a share from $2.50, while Tanona cut his 2008 profit view for JPMorgan to $1.60 a share from $2.30.

Tanona, however, raised his 2009 earnings estimates for the bank to $3.95 a share from $3.45, saying he expects the Washington Mutual deal to add to earnings as early as next year.

Separately, an analyst at WestLB said he regards “the resolution of WaMu’s fate as a positive for sentiment in both the US and European bank sectors.”

WestLB’s Neil Smith also said that JPMorgan’s acquisition of Washington Mutual’s deposits means that only Wachovia remains as “a potential concern” amongst the large U.S. banks.

However, the acquisition and related capital raising also means that JPMorgan is now probably off the list of potential participants in further global banking sector consolidation, Smith added.

Shares of JPMorgan were down about 5 percent at $41.33 in early morning trade on the New York Stock Exchange.

Wachovia shares fell 27 percent to $10 in morning trade on Friday.


Fox-Pitt Kelton analyst David Trone upgraded JPMorgan to “outperform,” partly due to likely upward revisions to consensus earnings estimates as management has factored in conservative revenue or cost savings from the Washington Mutual deal.

“We believe the company has marked its acquired assets from Washington Mutual and Bear Stearns at very conservative levels and thus the current 1.2 times price to book is attractive,” Trone wrote in a note to clients.

Financially, JPMorgan is paying $1.9 billion to acquire a business that is likely to contribute $2 billion to $3 billion in net income annually, Trone said.

Credit Suisse’s Katzke believes the Washington Mutual deal makes both strategic and financial sense for JPMorgan.

Katzke maintained her “outperform” rating on JPMorgan’s stock and said she expects the bank to fundamentally outperform peers based on the strength and stability of its senior management, balance sheet strength and competitive positioning.

“We continue to recommend purchase of JPMorgan as a core financial services holding,” she added.

Katzke set a new price target of $55 from a prior range of $50 to $55.

Separately, Citigroup analyst Keith Horowitz said JP Morgan’s well managed franchise and strong capital position will allow its management to operate from an advantaged position through the current environment.

Still the outlook for near to intermediate term remains challenged in light of higher credit costs in card and the retail bank, as well as the increasing likelihood of sustained lower revenue from JPMorgan’s capital markets business, Horowitz wrote in a note to clients.

He maintained his “hold” rating on the stock. (Editing by Jarshad Kakkrakandy, Anil D’Silva)

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