Will J.P. Morgan Keep the Bank Rally Going?

Although banking stocks were the worst performers in 2011, the new calendar year has somehow breathed new life into the sector.  Shares of Goldman Sachs (NYSE:GS) have gained 10 percent this year, while Bank of America (NYSE:BAC) shares have surged more than 23 percent.  However, with earnings season here, will the uptrend continue?

On Friday, J.P. Morgan Chase (NYSE:JPM) will announce its latest earnings.  The average estimate of analysts is for profit of 94 cents per share, a decline of 16.1% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from $1.11.  In the last quarter, JP Morgan beat estimates by 9 cents with earnings of $1.02 per share.  In fact, JP Morgan has beat estimates the past four consecutive quarters.  If the bank fails to do so on Friday, we would see a major sentiment shift in banks.

  • The majority of analysts covering the stock rate it as a buy.  Out of 26 analysts, 22 rate it as a buy, 3 rate it as a hold and none rate the bank as a sell.  In terms of ratings, JP Morgan has everything to lose from its earnings release.  An earnings miss from JP Morgan this Friday could derail the banking rally.
  • JP Morgan is not the only banking giant to receive a cut in expectations.  On Wednesday, Citi (NYSE:C) analyst Keith Horowitz cut Goldman’s  fourth quarter EPS expectations by more than half, from $2.45 to $1.10.  However, he still believes Goldman’s stock could be attractive.  He explains, “We continue to see strong value in GS shares trading at 75% of our $132/share year-end 2012 tangible book value estimate. New regulations & capital rules will create headwinds, but we have confidence this management team can recalibrate its business model to deliver mid-teen returns. One key question is whether this model will be driven off a smaller revenue base and balance sheet, which would potentially free up capital for share buybacks. With GS shares currently trading below tangible book value, we see this as a potentially attractive scenario, given any buybacks below TBV are accretive.”
  • Although investors may feel tempted to rush back into bank stocks, the euro zone crisis still remains.  In a recent interview, JP Morgan’s CEO Jamie Dimon said that his bank has a $15 billion net exposure to the PIIGS.  However, he said that he “won’t feel bad” if his bank loses $5 billion in Europe, because his intention is to stay in business for his clients.  While JP Morgan may stay in business through the euro crisis, investors might want to at least wait for a pullback in bank shares before jumping into positions.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com