JPMorgan Q2 Earnings Preview: What We're Watching

Jul.11.12 | About: JPMorgan Chase (JPM)

JPMorgan Chase (NYSE:JPM), the largest banking group in the U.S. in terms of assets, will announce its performance figures for the second quarter on July 13. Things have not gone too well for the bank in the past three months as a multi-billion trading loss from a hedging strategy that went bad is expected to cause a significant dent on its results. And the fact that competitor Wells Fargo (NYSE:WFC) will likely come up with record quarterly earnings on the same day will only add more pressure on JPMorgan's stock this week.

Investors would most likely focus on the performance of the bank's investment banking operations as a whole over the period marked by increased volatility in capital markets, while trying to gauge how an improvement in the traditional banking environment positively impacted the bottom-line.

We will update our $48 price estimate for JPMorgan's stock to capture the overall impact of the trading loss and the more recent energy market and LIBOR manipulation charges against it once the bank's Q2 2012 numbers are out.

See our full analysis of JPMorgan

Speculations About Actual Loss From Hedging Strategy Should End

On May 11, JPMorgan had announced that it was staring at a trading loss of at least $2 billion from a bad hedging bet (see JPMorgan's $2 Billion Hedging Loss Hits The Entire Banking Industry). Within a few weeks, analysts came up with a range of estimates for the loss – with some of them quoting possible losses of around $9 billion over two or three quarters. The loss that JPMorgan will likely recognize this quarter should be north of $4 billion (see JPMorgan's Trading Losses Could Climb, Sold Profitable Securities To Cushion Impact).

The numbers for JPMorgan's trading desk may not be so bad, though. This is because of the huge chunk of profitable trading assets that the bank sold over May and June to reduce the impact of the trading loss. Also, the bank is expected to benefit from an accounting profit linked to revaluation of its debt. What remains to be seen is how much these exceptional items affect the division's income statement for the quarter.

Retail Banking Business Should Offer Some Respite

Global economic conditions have gone downhill over the last three months, with the deteriorating situation in Europe, a slowdown in China and slow job growth in the U.S. fueling fears of an impending recession. As a consequence, consumers have tightened spending over the quarter, electing to save money to combat uncertainty in the months to follow.

This should directly benefit traditional banking services provided by JPMorgan, with the bank's deposits expected to receive a boost for the period.

Disclosure: No positions