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J.P. Morgan Leads Bank Shares Lower After $2 Billion Loss Disclosure

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05/11/2012 | 03:23pm CEST

-- Bank shares drop ahead of U.S. market open on J.P. Morgan loss disclosure

-- JPM leads banks lower, falling 8.3%, while others are down by about 2%-4%

-- Most analysts still stand behind bank

   By Christian Berthelsen 

Stocks of the major U.S. banking companies fell sharply in premarket U.S. trading Friday, led lower by J.P. Morgan Chase & Co. after the bank revealed a $2 billion trading loss in a previously little-known corner of the bank's vast operations.

J.P. Morgan shares were down about 8% ahead of the U.S. market open, and stocks of other major banking companies were down by a range of 2% to nearly 4%, exceeding moves lower in the major stock index futures.

Citigroup was off 3.8%, Goldman Sachs was down 2.7%, Bank of America was down 2.5%, Morgan Stanley was 2.1% lower and Wells Fargo was down 1.8%.

J.P. Morgan's loss--detailed in a hastily arranged conference call late Thursday--stemmed from a large hedge position that was essentially bullish on the economy, by selling credit default swaps on an index of corporate debt.

The cost of the swaps began to rise last month, and the bank began to unwind the position at a loss.

The trade was put on by J.P. Morgan's Chief Investment Office, a unit which invests the bank's surplus assets. Such offices are common at big banks, though most say they invest in low-volatility, low-risk vehicles such as Treasuries to protect against interest rate and inflation risk.

Still, J.P. Morgan says it will be profitable in the second quarter despite the loss, after recording $5.2 billion in net income in the first quarter and $19 billion in 2011. The bank has $184 billion in shareholder equity.

Analysts remained behind the bank, however, with many leaving their ratings on J.P. Morgan stock unchanged. Still, many noted the debacle is likely to play in to the hands of regulators and banking industry critics calling for tougher oversight and more limitations on risk, which could impede a source of revenue and profits for the major banks in the future.

"The timing of JPM's announcement is unfortunate given the growing market concerns about risk exposures of all major U.S. banks, and the unfinished nature of the Volcker Rule, and is likely to result in weak performance for all [large bank] stocks in the near term," Wells Fargo said in a note.

Evercore Partners re-affirmed its 'buy' rating on the stock, but added: "Implications could be significant depending on how much such CDS had been helping to bolster results previously, lingering losses, and perhaps most importantly, how regulators view this for JPM and the industry overall given [the] pending Volker rule" that would scale back proprietary trading.

-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381; christian.berthelsen@dowjones.com.

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Financials ($)
Sales 2016 33 330 M
EBIT 2016 7 801 M
Net income 2016 4 891 M
Debt 2016 -
Yield 2016 2,18%
P/E ratio 2016 12,70
P/E ratio 2017 10,94
Capi. / Sales 2016 1,89x
Capi. / Sales 2017 1,80x
Capitalization 62 956 M
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Mean consensus OUTPERFORM
Number of Analysts 27
Average target price 34,6 $
Spread / Average Target 5,0%
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James Patrick Gorman Chairman & Chief Executive Officer
Thomas Colm Kelleher President
James A. Rosenthal Chief Operating Officer & Executive Vice President
Paul C. Wirth Director-Finance & Controller
Jonathan Pruzan Chief Financial Officer & Executive Vice President
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