May 10, 2012
JPMorgan Chase & Co. Neutral
The London Whale Blows? JPM
JPM uncharacteristically disclosed an outsized trading loss tied to its principal Price Target $50.00
risk management unit. While a meaningful strike against JPM and its history of
sound risk management, the implications for the broker/dealers couldn't be worse
Banks & Thrifts
as regulatory reform and intensified scrutiny of the brokers, likely escalates further.
To this end, we reiterate our negative view on the broker/dealers. Todd L. Hagerman
■ JPM discloses a $2B trading loss post 1Q12 earnings. In somewhat unusual (212) 338-4744
fashion, JPM hosted an ad-hoc conference call following the release of its 1Q12 firstname.lastname@example.org
10-Q, disclosing that the company would incur a gross trading loss of $2B tied Robert Greene
to the company's Chief Investment Office (CIO). The $2B loss was the result (212) 763-8296
of significant mark-to-market losses within its synthetic derivatives portfolio, email@example.com
primarily used to hedge the company's credit risk. The company also realized a
$1B of securities gains (also in CIO), somewhat offsetting the loss. Consequently Company Data
the company updated its guidance in its Corporate segment from net income of ~ 52-Week Range $27.85 - $46.49
$200mm to an after-tax loss of $800mm in 2Q12, or a roughly $0.21/share drag Market Capitalization (M) $155,346.4
on 2Q12 earnings. Shares Outstanding (M) 3,822.5
Avg. Daily Vol. (000) 38,563.0
■ Unwinding synthetic positions only adds to volatility throughout 2012. The
CIO holds about $300B within its portfolio, with the synthetic credit portfolio
utilized primarily as a hedge against a stressed credit environment. The company
expects to unwind its position throughout the remainder of 2012, which could
add $1B or more in additional losses as volatility remains high in the unit. The
potential size of additional losses is contingent on market conditions as well as
management of the portfolio throughout the year.
■ Headline risks abound, but core fundamentals unchanged. To be sure, the
timing and magnitude of the announcement are certainly poor, given the intensity
of the current regulatory debate surrounding proprietary trading (Volker) and
the negative optics surrounding the outsized use of synthetic derivatives to
hedge credit risk across the organization. While the trading loss was certainly
a case of poor execution, design and severely deficient risk management,
underlying business trends are relatively unchanged, as management's outlook
for 2Q12 (ex. trading losses) remained consistent with the 1Q12 earnings call--
including current net income estimates of approximately $4B after tax in 2Q12.
Additionally, management suggested that the CIO losses and ongoing volatility
would likely have no impact on the company's capital program following its
successful 2012 CCAR results.
■ Valuation buttressed by JPM's ample share repurchase program. The
announcement is sure to invite skepticism of JPM shares, particularly in light
of its premium valuation and 23% share price appreciation YTD. However,
we would note that the company's $12B share repurchase authorization gives
JPM significant flexibility to deploy capital and buy back shares in the event of
outsized price weakness - providing an implicit floor for the stock ($34.19 TBV).
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
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May 10, 2012
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.1 trillion and operations in more
than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking,
financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan
Chase & Co. serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and
government clients under its J.P. Morgan and Chase brands.
Regulation Analyst Certification:
I, Todd L. Hagerman and Robert Greene, hereby certify the views expressed in this research report accurately reflect my personal views
about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed by me in this report.
Sterne, Agee & Leach, Inc. makes a market in the following subject company JPMorgan Chase & Co..
Sterne, Agee & Leach, Inc. provided and received compensation for providing non-investment banking securities related services for
the following subject company within the past 12 months: JPMorgan Chase & Co..
Sterne, Agee & Leach, Inc.'s research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach,
Inc.'s total revenues, a portion of which is generated by investment banking activities.
Sterne Agee & Leach, Inc. expects to receive or intends to seek compensation for investment banking services from the subject company
and/or companies in the next three months.
Price Target Risks & Related Risk Factors:
Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve
Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect
demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or
industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability
to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could
affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry
size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and
expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry
or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings
multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects
the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors.
Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc.
Definition of Investment Ratings:
BUY: We expect this stock to outperform the industry over the next 12 months.
NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months.
UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months.
RESTRICTED: Restricted list requirements preclude comment.
IB Serv./ Past 12Mos.
Rating Category Count Percent Count Percent
Buy 228 49.67% 12 5.26%
Neutral 204 44.44% 6 2.94%
Underperform 27 5.88% 0 0.00%
Appendix Section, Page I
May 10, 2012
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.
Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not
represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or
more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein
and may act as principal or agent to buy or sell such securities.
Copyright © 2012 Sterne, Agee & Leach, Inc. All Rights Reserved.
To receive price charts or other disclosures on the companies mentioned in this report, please visit our website at https://
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Appendix Section, Page II