JPMorgan faces major risks, but is still undervalued

Europe's debt-tangle could spread to the stronger French and German economies.

By Trefis Nov 29, 2011 4:35PM

JPMorgan Chase's (JPM) stock is caught up in the undercurrent that is dragging down share prices of all financial sector firms. The bank's shares are trading around $29 -- lows the stock hasn't seen since early 2009. Clearly the fact that the bank surpassed rival Bank of America (BAC) to become the largest in the U.S. in terms of total assets last quarter did not help its stock much.


In view of the weak global economic conditions -- primarily escalating debt in Europe -- and the string of lawsuits concerning the bank, we reviewed our analysis for JPMorgan and revised our price estimate for its stock from $45 to $39.


The new price estimate is still nearly 40% above the stock's current market price -- the result of the extremely pessimistic market sentiment toward all banks with exposure to Europe.


Below, we explain the rationale for our 14% reduction in price estimate for JPMorgan's stock.

See our full analysis of JPMorgan

Sales & Trading Operations Expected to Remain Depressed

The extremely volatile market conditions resulted in poor sales and trading operations for nearly all investment banks in Q3 2011. Although banks have cut down considerably on their exposure to the riskiest economies in Europe, the danger of the debt-tangle spreading to the stronger French and German economies looms large, and banks are expected to be more cautious with their trading operations in the near future.

JPMoragn Total Trading Assets

This should result in slower growth in JPMorgan's trading assets than we had previously forecast, at least for the next two years.

Advisory Services To Find Less Takers

JPMorgan's investment banking operations are also expected to slow down in the near term as economic conditions threaten to reduce global capital-raising activities. This will drive down the volume of debt origination, equity origination, as well as M&A deals.

JPMoragn Global M&A Deal Volume
We have shaved off nearly 25% from our earlier estimates for the size of global M&A deal volumes over our forecast period.

Mortgage Banking Operations To Remain a Concern

We have also updated our analysis of JPMorgan to incorporate detailed data about the bank's mortgage business, including revised estimates for the provision for losses expected from the operations.

JPMoragn Average Real Estate Portfolio Size

With investors already showing concern about the quality of the real estate portfolios held by major banks, we expect the size of JPMorgan's real-estate loan assets to shrink over the years to come. The number of lawsuits related to mortgages pending against the bank will also drive up costs for the division in subsequent years.



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