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JP Morgan: Patience Could Be Rewarded As Valuation Compelling

 May 23, 2012 03:48 PM

(By Mani) JPMorgan Chase (NYSE:JPM) said that it would suspend its share repurchase program, highlighting a desire to show a continued glide path to Basel III compliance. However, on the valuation front, the shares look attractive and patient investors are likely to be rewarded once shares will get back to their normal levels.

The company's Tier 1 Common Basel III ratio as of March 31 was lowered by 20 basis points to 8.2 percent due to the risk-weighted assets (RWA) impact from the trading loss and value at risk (VaR) uplift.

"We estimate that the $2 billion trading loss would lower the Basel III ratio by another 12 bps (the realized gains in the AFS portfolio do not impact Basel III)," UBS analyst Brennan Hawken wrote in a note to clients.

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Hawken also cut his 2012 earnings estimates on lower share buybacks. The analyst now expects 2012 earnings of $4.80 a share, down from $4.90 a share. Wall Street expects the bank to earn $4.45 a share, according to analysts polled by Thomson Reuters.

JPMorgan, a Dow component, repurchased a total of $1.3 billion worth of stock in 2012 through April 30 and around $200 million was repurchased in the first quarter of 2012.

New York-based JPMorgan said since March 31, 2012, its Chief Investment Office has had hefty mark-to-market losses in its synthetic credit portfolio that has proved to be riskier than expected.

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Following the disclosure by the company, Fitch Ratings downgraded JPMorgan's long-term issuer default rating (IDR) to 'A+' from 'AA-'. Fitch also has placed long-term ratings of JPMorgan on Rating Watch Negative.

In addition, Standard & Poor's lowered its ratings outlook on JPMorgan to negative from stable. However, S&P affirmed 'A/A-1' issuer credit ratings on JPM and 'A+/A-1' issuer credit ratings on its banking subsidiaries.

JPMorgan noted that additional losses could be as much as $1 billion or more and that volatility would likely be high for the next couple of quarters, but that hopefully the issue will be resolved by year end.

However, investors and regulators have slammed the bank for poor trading governance and risk management at its trading unit, which was designed to manage the risks that it takes with its own money.

The news stunned Wall Street as JPMorgan is generally considered as a better-run institution and raised calls for tougher regulation of big Wall Street bank

The hefty trading losses led JPMorgan to replace Ina Drew with Matt Zames as Chief Investment Officer, replacing retiring Ina Drew. Zames was the co-head of Global Fixed Income in the Investment Bank and head of Capital Markets within the Mortgage Bank.

"No quick fix here, but CIO was not dramatically over-earning, in our view," said Hawken, who has a "buy" rating and $46 price target on JPMorgan shares.

However, on the valuation front, shares of JPMorgan look attractive given its strong fundamentals as the stated trading loss of $2 billion is about only 1 percent of the company's market cap and 2 percent of its 2011 revenue of $99.8 billion. In addition, the bank's losses would not impact its fiscal 2012 outlook.



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