JPMorgan looks good, but who wants to buy banks?

Sure, JPMorgan Chase is one of the strongest banks in the long run. But the long run doesn't matter to investors right now.

By Jim J. Jubak Oct 13, 2011 4:45PM
The market isn’t going to cut even the strongest banks any slack -- or look beyond the current quarter.

That’s the message in the market’s reaction to JPMorgan Chase's (JPM) third-quarter earnings report, released before the New York market opened. The bank reported better than expected earnings -- on a one-time accounting adjustment -- but said revenue grew by just 0.1% from the third quarter of 2010.

JPMorgan Chase shares closed Thursday down 4.8% to $31.60.

If you’ve got a perspective of more than a quarter or two, the size of that drop is surprising. The bank reported a 30% jump in deposits and said, basically, that it was swimming in liquidity.

Those aren't bad things to have going for you when most of the world’s banks are scrambling for capital. JPMorgan Chase is clearly, in the long run, one of the world’s strongest banks, and it should be able to use that strength to pick up business from competitors.

But no one, I’d say, is willing to look that far ahead.

Of course, the current quarter had its share of worries besides the tiny gain in revenue. The bank booked a big $1.9 billion pre-tax gain in the quarter that added 29 cents to the company’s earnings in the period.

Taking out that one-time gain -- and one-time losses in the private equity unit and for additional litigation expense --  wipes out 5 cents per share of the company’s earnings. Instead of beating by a very impressive 8 cents a share, the bank exceeded Wall Street’s earnings projections by a much more modest 3 cents a share.

It still sounds pretty good, until you notice that adjusted earnings of 97 cents a share is a big 23.6% lower than last quarter’s earnings of $1.27 a share.

All the evidence is that the banking business just isn’t growing right now.

For example, JPMorgan Chase showed a 13% drop in investment-banking revenue from the second quarter. And the damage was spread across this unit. Investment banking fees fell 31%. Revenue from fixed income markets fell 14% (after you subtract accounting events). Equity underwriting fees dropped 47%.

And profitability is certainly a question. The bank’s return on equity fell to 9% in the quarter, from 10% in the third quarter of 2010, and 12% in the second quarter of 2011.

Which isn’t to say there wasn’t any good news. Commercial loans grew by 9% in the quarter. Deposits, as I noted, were up 30% -- and deposits are incredibly important right now, when funding operations in the financial markets remain so uncertain.

The bank said its estimated Basel III Tier 1 capital ratio would be 7.7%. Very solid, especially when you consider that raising that ratio to 9% -- as may be required of a big bank like JPMorgan Chase when Basel III is finally written -- doesn’t look to be much of a struggle for this bank.

After all, the bank bought back $4.4 billion in shares last quarter. That’s cash available to increase the Tier 1 ratio when needed.

It’s hard to know what kind of rating to give these shares now. On the long-term fundamentals, I’d rate the bank a buy. Standard & Poor’s calculates a one-year target price of $52 a share (a tidy gain from today’s $31 price) and Credit Suisse figures the shares will be worth $58 in a year.

On the sentiment though? Forget it.

With Europe’s banks being urged to recapitalize, with talk today that 66 big European banks would fail a new proposed stress test, with Greek default a real possibility, who is buying bank shares today, no matter what the long-term prospects? (JPMorgan Chase said in the conference call today that its exposure to a Greek default is just $3 billion to $5 billion.)

I’d say this averages out to a neutral.

Citigroup (C) and Wells Fargo (WFC) are the next big U.S. banks to report, on Oct. 17. Bank of America (BAC) follows the next day.

Jim JubakAt the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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Oct 13, 2011 8:00PM
the long run doesn't matter to investors right now.


It’s a sad but true comment, because, the long run is what true investing is supposed to be about. In the case of banks, they brought this on themselves, leading investors by example to become traders and speculators. If you watch what banks do, as opposed to what they say, it appears the long run to them is now about 90 days. I should talk. I just sold BAC Nov 2011 put options today with a $5 strike hoping to collect the time premium before the company goes bankrupt.


Oct 13, 2011 5:09PM
hate me or what ever i see a bunch of pissy azz grey hairs who will no doutedely be dead in a few years out to screw whoever they can and since there is NO law to bring these azzes to justice the american people get the shaft i say quit playing games with these people BREAK THE LAWS FRAUD OR OTHERWISE STRIP THEM OF THERE ILL GOTTEN GAINS AND ALL OR ANY OF THERE FAMILY SEND THEM TO JAIL quit listening to the law say we need to protect you from those robbers they do it one person at a time when these banks brokers destroy thousands and thousands of lives buy robbing people of there hard earned moneys
Oct 14, 2011 7:56AM
just gimme the name and address of one oil speculator just one
Oct 14, 2011 2:15AM

Other banks will be happy to buy banks. They can screw more people out of their money. I won by filing bankruptcy and screwing them out of $146,000. Everyone who can should do the same thing. You will suffer some consequences but will be a winner in the long run. It feels good to beat them at their own game.

Oct 14, 2011 10:24AM
Wink Buffet, When all's lost and everybody sells it's time to start buying!
Oct 14, 2011 8:20AM
I read the article yesterday about the earnings call. I did a little math and took out the 1.9 billion credit they would have gained if they paid off debt at current value. (Creative accounting) Then refigured the compensation expense they reported as a low 29% at 1.85 billion. It became 77% of the 2.4 billion in actual income. HUM? The threat to the economy if JP and others where forced to go by the increase in the capital ratio doesn't pan out much different! They are sitting on loads of cash (Capital ratio) even after buying back 4.4 billion in shares? There is only a threat to the economy because of the capital ratio when the economy is booming and the demand for loans is high! Currently everyone has excess cash and no one is borrowing because of the economy. Why the scare tactics? Perhaps the stock went down because someone besides myself is not fooled.
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