What did one bank stock say to the other?

“I haven’t lost interest” goes the old kids’ joke. So does professional courtesy get in the way when one of the top investment banks in the world rates another one? New York-based Deutsche Bank large cap US bank analyst Matt O’Connor maintains his buy rating on JPMorgan Chase, but he can’t quite bring himself to discuss his subject in Spaghetti-Western film terms:  the good, the bad and the ugly. Instead the analyst divides his discussion into three sections: the good, the not so good and the special/lumpy items.

Deutsche Bank (ETR─DBK; NYSE─DB) Analyst Matt O’Connor maintains his “buy” recommendation for New York-headquartered multinational banking and financial services stock JPMorgan Chase & Co. (NYSE─JMP). He also reiterates his target price of $75.

JPMorgan reported third quarter results that were skewed by one-time items including a large tax credit, legal charges and the release of funds that had been held in reserve for bad loans that, in the end, were repaid. Excluding these, EPS came in at $1.32 – slightly below Deutsche Bank’s forecast of $1.35. This reflected softer than forecast revenue and higher than anticipated expenses.

At the same time, however, Mr. O’Connor notes, credit quality improved and the bank shored up its capital levels.

In his report, the analyst divides the results up into three sections: “The Good,” “The Not So Good” and “Special/lumpy items.”

The top item under “The Good” may surprise some readers: trading decreased 16 per cent from a year earlier. That may not sound positive, but it’s a smaller decline than expected. Moreover, excluding the sale of businesses, trading dipped just six per cent.

JP Morgan Chase one of world’s largest investment banks

Another positive was a four per cent rise in investment banking fees, propelled by strong advisory fees and debt capital markets activity.

As well, average loans rose eight per cent on strength in both prime mortgage and wholesale.

“The Less Good” included net interest income and fees that came in $100 million and $300 million, respectively, below Deutsche Bank’s estimates. However, Mr. O’Connor says, the former can be read as a positive: lower net interest income reflects the sale of assets, as JPMorgan moves to optimize its balance sheet. This view, he adds, is supported by the seven basis point rise in net interest margins, which signals that its balance sheet efficiency is improving.

Two other “Less Good” factors were slightly higher than forecast expenses and a 24 per cent increase in wholesale “non-performing assets” (i.e., bad loans) and higher wholesale credit reserves (for potential bad loans).

The “Special/lumpy items” included $2.2 billion in tax credits, $1 billion in legal charges and a modest gain of $281 million on a loan loss reserve release. The investment bank also recorded a series of smaller items that total less than a penny a share.


Investor’s Digest of Canada, MPL Communications Inc.
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