JPMorgan: Impact Of Loss Scenarios On EPS

May.30.12 | About: JPMorgan Chase (JPM)

Since JPMorgan Chase (NYSE:JPM), the nation's largest bank with $2.3 trillion in assets, pre-announced on May 10, a more than $2 billion material loss expected in a portfolio of credit default swaps, fears have been mounting from several sources that the loss could be wider than anticipated.

Some traders, insiders and market watchers predict that losses might grow for a variety of reasons. JPMorgan and CEO Jamie Dimon have refused to comment further other than to say they will not rashly sell the existing portfolio. So the investing public has no idea what measures the bank is taking to reduce potential losses or if losses will, in fact, increase.

Although the stock has dropped 20% from the pre-announced price of $40.64, it has since stabilized at $33.80 as of May 25. Book value for the shares is at $47.60 based on March 31 results. The table below shows the impact of potential loss scenarios on the bank's earnings per share for the quarter, current and next fiscal year.

Loss Amount Impact on EPS1 Quarterly EPS2 2012 EPS3 2013 EPS4
$800Millon $0.21 -21.2% N/A N/A
$2.0 Billion $0.53 N/A -11.9% -9.8%
$3.0 Billion $0.79 N/A -17.8% -14.8%
$5.0 Billion $1.31 N/A -29.7% -24.6%
$10.0 Billion $2.63 N/A N/A -49.2%
1Loss calculated based on 3.8 billion shares outstanding at 3/31/2012
2Quarterly EPS based on 3/31/2012 data
32012 EPS based on forecasted mean average of analyst's estimates ($4.42) for 2012
42013 EPS based on forecasted mean average of analyst's estimates ($5.34) for 2013
Click to enlarge

The current stock price reflects the initial 21% loss for Q2 2012 based on the $800 million forecasted quarterly loss. The overall impact should losses increase represents anywhere from a 12% loss in EPS for 2012 at a $2 billion loss to an almost 50% loss in EPS for 2013. It is more than likely losses will fall somewhere in between these extremes, but clearly JPMorgan can absorb the impact of the faulty trading position. The bank reported a revised $18.97 billion profit for all of 2011 and also reported an overall net income of $5.38 billion for the first quarter of 2012.

Also see JPMorgan Chase: Putting Losses in Perspective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.