JP Morgan Earnings Highlight a Major Challenge for All Big Banks


One of the hottest stocks in the land is limping into a long weekend this morning after earnings failed to impress investors, not only casting a shadow over JP Morgan (JPM), but stoking concerns about the entire Financial sector.

Officially, JP Morgan's fourth quarter net income fell 23% to $3.7 billion, or $0.90 per share. While that met expectations, the biggest U.S. bank by assets stumbled on the revenue side, with a 9.6% decline that fell nearly a billion dollars short of estimates.

"They barely got over a very low bar," says Charles Smith, CIO of Fort Pitt Capital and manager of the Fort Pitt Capital Total Return Fund (FPCGX), pointing out that the EPS estimate had come down about 20% in the past month alone. "Their revenue growth was very weak," he says, particularly at the investment bank were the top line shrank 30%.

"The fact that he (CEO Jamie Dimon) said he was proud of an 11% ROE is really telling," Smith says in the attached clip, adding that revenue growth is going to be tough for all the universal banks.

He believes slow revenue growth and shrinking ROE's (Return On Equity) is going to be the theme for the other big banks, many of which report results next week: Citigroup (C) and Wells Fargo (WFC) on Tuesday, Goldman Sachs (GS) on Wednesday, and Bank of America (BAC), Morgan Stanley (MS) and American Express (AXP) on Thursday.

Another reason for the poor reaction is simply because JPM and the broader Diversified Financials Industry have become market leaders, after shedding 25% and finishing in the bottom of the pack for 2011. Even though 85% of analysts who follow JP Morgan rate it a ''buy'' with an average price target of $45, Smith is not interested.

"There's going to be a continued opaque nature for these earnings reports going out at least another year," he says, adding that things like ongoing expenses for mortgage litigation and write downs will continue to muddy up the results.

To be fair, while the 4th quarter numbers appear to reflect a ''very weak December,'' the powerful earnings story of the full year cannot be ignored, where JP Morgan netted a record $19 billion profit for 2011.

Have the recently re-heated bank stocks gotten ahead of themselves or can they recover and resume their trek higher?

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