JPM: No Longer Immune to Credit Turmoil

Earlier this week, JP Morgan Chase (JPM) acknowledged a “substantial deterioration” in trading conditions thus far in the third quarter. Apparently, market watchers who have recently called a bottom for financial stocks may need to rethink their supposition. JPM announced that it will write-down an additional $1.5 billion related to soured mortgage-backed securities and loans. This is more than the $1.1 billion dollars of write-downs the company claimed for the entire second quarter. JPM’s second quarter results had been viewed as surprisingly strong—despite a 53% decline in earnings—with the company achieving a boost from solid stock and bond underwriting. The New York-based-bank had been viewed by many as a one of the few safe bets in the struggling financial sector because it had avoided—relatively speaking—the massive write-downs that have plagued so many of the other major banks. With this mid-quarter write-down bombshell, that myth has been busted.

As JPM’s latest SEC filing discloses, as of June 30 it had $19.5 billion in Alt-A mortgage exposure, $1.9 billion in sub-prime exposure and $11.6 billion in commercial mortgage-backed securities [CMBS]. Also, JPM has heavy exposure to credit card and other consumer debt instruments which are looking increasingly troublesome. Thus, the iconic bank is hardly immune from the difficulties that many in the financial sector are feeling and will likely face more difficulty to come.

The devastation in the credit market was bound to affect such a major investment house as JP Morgan. Its NY-Fed-arranged acquisition of Bear Stearns with its dicey balance sheet may impact JPM for a few more quarters looking forward. However, as many will recall, losses to JPM related to liquidation of Bear Stearns’ assets will be capped at $1 billion with the Fed covering the next $30 billion of losses. So, JPM will not be able to use Bear Stearns and James Cayne as scapegoats for long; the onus is squarely on JPM and its CEO Jamie Dimon. JPM’s core businesses of consumer banking and capital markets were supposed to complement one another and smooth out the vagaries of the business cycle. This time, that defensive strategy may have met its match in a market environment that analyst Richard Bove of Ladenburg Thalmann has termed “as close to a perfect storm as the bank can get.”

Ockham currently rates JPM a Hold as it appears that the credit crisis may take more time to unravel completely. JPM stock has not been hit as hard as most major financials up to this point because of the air of invincibility that seemingly surrounded the stock and its management team. By our valuation methodology, JPM is appropriately priced between our rationally expected range of $35 to $45. We will take a cue from CEO Jamie Dimon’s cautionary statement from the second quarter results, where he stated that although JP Morgan did better than most had expected, the mortgage market continues to decline and the economy is slowing.

Comments

[prescient11:]

They never were immune, who writes this tripe. MER caused this. Plain and simple. Even after this writedown, they are not done. Probably another $4-5B to mark down, if they are truly marking it to market. Kind of an oxymoron if there's no market. What a wonderful model. Can't believe the genius accountants could not figure another theory up.

Market becomes irrational, then your assets are worthless, then you have to sell your worthless assets at a fire sale to raise more capital, then you disrupt the market again.

Rinse and repeat.

Only the non-regulated can afford to jump in like vultures and pick the bones clean. Vultures are usually fat.

2008 Aug 13 11:44 PM