JPMorgan Shares Can Find Bottom if 'Whale' Surfaces
NEW YORK ( TheStreet) -- All eyes will be on JPMorgan Chase (JPM) as it kicks off second quarter bank earnings on Friday and tries to stem a 15% stock drop since it disclosed a multi-billion dollar trading loss in May.
An earnings report that shows JPMorgan has exited most of a 'poorly conceived and vetted' trade at an approximate $5 billion loss may put a floor on the banks' share woes.
JPMorgan's expected near 40% year-over-year drop in second quarter earnings will be driven by new disclosures on the losses of an obscure trading position in corporate credit derivatives from its Chief Investment Office, a unit of the bank that sits outside of its core operations and invests excess deposits.
The primary concern is whether the bank has unwound the vast majority of the loss-making trade, or if CIO losses will linger as a risk to the bank's earnings and reputation in coming quarters. CEO Dimon will detail the loss in a two-hour session with analysts after earnings are released on Friday.
While Jamie Dimon has already been candid about his failure to properly manage the unit that made the backfired trade, he nevertheless needs to deliver on assurances that the bank can manage and unwind the position, which Bloomberg previously reported was in the $100 billion range.
After delivering industry-leading profitability in the first quarter, the bank was rattled when a 'London Whale' trade it had amassed in illiquid credit products soured, causing CEO Dimon to disclose a $2 billion loss that could grow in size as JPMorgan exits the position, reshuffles top executives and retools risk assessment models.
Dimon called his mismanagement of the situation an instance of egg in his face in May, but the bigger question is whether he can get a handle on it and stem further earnings or reputational bleeding.
For America's largest and most profitable bank, a focus on trading losses are an unfamiliar position - and an opportunity.
"The size of the loss is not really the issue, the issue is has it been dealt with," says Marty Mosby, a bank analyst with Guggenheim Securities, who notes JPMorgan shares could bottom if the bank reports it has unwound most of the failed trade and at a loss in line with recent media reports and analyst estimates of between $4 billion and $9 billion. "Anything less than $10 billion and we believe the management team can keep moving along," he says.
JPMorgan's shares have fallen over 15% since it disclosed the loss, closing at $34.59 in Wednesday trading.
Dimon's forceful June testimony in front of Congress and reports that the bank had unwound most of the trading position through hedge fund BlueMountain Capital have helped JPMorgan's stock recover from 2012 lows at $31 a share. Still, there's uncertainty as to whether the debacle is a rare instance of poor execution on JPMorgan's part or if it's a revelation of widespread issues that could tarnish its standing as an industry leading risk manager.