(By Mani) JPMorgan Chase & Co. (NYSE:JPM) let the cat out of the bag on Friday with Chief Investment Office (CIO) losses reported at $4.4 billion, removing a big overhang on the shares.
More than anything else the "London Whale" trading issue and the surrounding concerns led JPM stock sold off by 16 percent between May 10 and July 12, while the broader BKX index was only down 5 percent.
With the hurdle removed, investors should get over the near-term hiccups and instead concentrate on the strong underlying fundamentals of the company, which is still considered best in the industry.
JPMorgan has reduced the problematic CIO position by about twothirds to about $30 billion and is unlikely to impact future results significantly. This implies that the risk weighted assets (RWA) terms the position was about $100 billion at its peak which is precisely what the media reported.
In addition, the CIO will no longer trade a synthetic credit portfolio and will focus on its core mandate of conservatively investing excess deposits to earn a fair return. There is no denying of the fact that the issue has been costly both in economic terms and in terms of the multiple killing effect of putting themselves into the center of a political and media circus, but it's done.
"While the psychic scars may persist for some time, our key takeaways are that the six major business lines are performing well; that the company has a strong and building capital position; and that after paying whatever penance they need to the regulators, they are well positioned for substantial share repurchases," Oppenheimer analyst Chris Kotowski wrote in a note to clients.
CEO Jamie Dimon indicated that after the board concludes its review of the CIO loss, they would reapply to the Fed and hopes to restart share repurchases early in the fourth quarter of 2012.
"Thus, while the experience has been tough on investors the issue seems to be behind them," the analyst added.
JPM has largely wound down the position, the remaining stressed losses are between $800 million and $1.7 billion, making room for investors to focus back on the underlying businesses.
In the second quarter, the company's net income declined to $4.96 billion or $1.21 per share from $5.43 billion or $1.27 reported last year. On average, 23 analysts polled by Thomson Reuters expected earnings per share of $0.72 for the quarter. Analysts' estimates typically exclude one-time items.
Total net revenues, on a reported basis, dropped 17 percent to $22.18 billion, while analysts estimated revenues of $21.90 billion for the quarter.
The bank's result showed a weak investment banking business due to weak capital markets, and a pressured net interest margin (NIM).
However, JPMorgan's credit quality continues to improve as the provision for credit losses plunged 88 percent to $214 million. While charge-offs seem to be bottoming out, the company continued to chew through its nonperforming assets.
The firm's nonperforming assets totaled $11.4 billion at June 30, 2012, down from the prior-year level of $13.4 billion. Consumer net charge-offs were $2.3 billion, compared with $3.0 billion in the prior year, resulting in net charge-off rates of 2.51 percent and 3.25 percent, respectively.
JPMorgan sees the Basel III Tier 1 common ratio at 7.9 percent after the impact of final Basel 2.5 rules and the Federal Reserve's recent Notice of Proposed Rulemaking. Return on equity (ROE) was 11 percent, and return on tangible common equity was 15 percent.
The company's book value per share grew 8 percent, with tangible book value at $35.71. As the company's shares are trading at around $35 to $36, the valuation looks cheap.
"While the CIO loss may drag on investor confidence for a while, JPM is arguably the world's strongest large bank and is trading at just 6x our 2013 estimate. We continue to believe that the stock is very attractive," Kotowski added.