IB Net Payout Yields Model

JPMorgan Results were Stellar

The market might have sold off today 'due' to the results at JPMorgan (JPM) and the fears of higher credit costs, but if anything it was a buy the rumor and sell the news. Or maybe just the media reporting the results in such a negative way that it scared the market. We'd bet that come Tuesday, all the buyers will be back as they realize that JPM could easily earn $3.5 next year making the stock clearly cheap.

JPM reported net income of $3.3B or $.74 per share easily beating the $.61 estimates. Revenue was lower then expected, but that's nothing to get excited about in this recovery. Earnings rule revenue any time of the day. They beat estimates by 20% after all but that got quickly brushed aside.

  • reported fourth-quarter 2009 net income of $3.3 billion, compared with net income of $702 million in the fourth quarter of 2008. Earnings per share were $0.74, compared with $0.06 in the fourth quarter of 2008. For the full year of 2009, net income was $11.7 billion, or $2.26 per share, up from $5.6 billion, or $1.35 per share, in 2008.

The big key to the earnings report is that JPM added $1.9B to the provision for loan losses. Or basically earnings could've been $5.2B based on net charge offs level. Its easy to assume that loan losses should start to moderate or drop so it seems overly conservative for provisions to continue increasing at this rate. (hmm, maybe they wanted to keep earnings down to avoid the Obama TARP tax from gaining steam)

  • Credit costs remained high: added $1.9 billion to consumer loan loss reserves, resulting in firmwide credit reserves of $32.5 billion and loan loss coverage ratio of 5.5%
  • Commenting on the firm’s balance sheet, Dimon added: “In the fourth quarter, we further strengthened our credit reserves to nearly $33 billion, or 5.5% of total loans. Our earnings generated additional capital, and we ended 2009 with a very strong Tier 1 Capital ratio of 11.1% and a Tier 1 Common ratio of 8.8%. We remain confident that this capital and reserve strength, combined with our significant earnings power, will allow us to meet the uncertainties that lie ahead and still continue investing in our businesses and serving our clients and shareholders over the long term.”

Interesting video from CNBC regarding asset quality stabilizing. Dick Bove is on a high horse regarding the economic comments from the CEO as he was clearly low balling. Oddly he says to buy the stock even after his rant. More evidence that we're likely to see a couple big upgrades come Tuesday sending the stock and market to new 52 week highs.

No position in JPM at this point, but this makes us more comfortable about other financial positions like Regions Financial (RF) and Synovus Financial (SNV). Morgan Stanley (MS) is concerning on whether the new TARP tax will hold it down for a while.


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