AP
JPMorgan shares tumble on widening 3Q losses
Tuesday August 12, 6:25 pm ET
By Sara Lepro, AP Business Writer
JPMorgan shares fall after bank reports widening losses related to mortgage debt in 3rd qtr


NEW YORK (AP) -- JPMorgan Chase & Co. shares tumbled nearly 10 percent Tuesday as the bank's disclosure about escalating losses in its mortgage portfolio set off new concerns about the health of the overall financial sector. An analyst's lowering of the bank's earnings estimates and price target contributed to the decline.

JPMorgan Chase plunged $3.88, or 9.3 percent, to close at $38.01. It has traded between $29.94 and $49.95 in the past 12 months.

In a filing with the Securities and Exchange Commission late Monday, the bank said turbulence in the credit markets have caused it to lose about $1.5 billion, after hedges, in its mortgage-backed securities and loans to date in the July-to-September quarter. That's more than the $1.1 billion in losses JPMorgan incurred in its investment bank's portfolio during the second quarter.

Subsequently, Ladenburg Thalmann analyst Dick Bove cut his full-year profit estimate on the bank to $2.23 per share from $2.46 per share. Analysts polled by Thomson Reuters, on average, forecast earnings of $2.47 per share in 2008.

"Virtually every part of the capital markets business is suffering at the present time," Bove said. Specifically, he said, the bank is underwriting fewer deals, which weakens the flow of investment banking fees, commissions, margin interest, the investment management business and future merger-and-acquisition activity. Moreover, Bove said, the weakness in the equity markets is hurting private equity profits.

At the same time, he said, the consumer side of the business is suffering as household wealth declines, the cost of basic necessities increase, unemployment rises and the housing market remains weak.

This means higher loan losses in its home equity, credit card, auto and even small business loan portfolios, Bove said.

A Chase spokeswoman, Tasha Pelio, said, "JPMorgan Chase does not comment on analyst notes."

Bove maintained a "Neutral" rating on the shares, and cut his 12-month target price to $39 from $43.

He said he does not see the pressures on the bank subsiding until well into next year.

"No company, no matter how well managed, can avoid being impacted by weaknesses in its core business," he said.

JPMorgan's news sent other financial stocks falling. Citigroup Inc. fell $1.28, or 6.46 percent, to $18.54, and Bank of America Corp. fell $2.25, or 6.74 percent, to $31.13.

On Monday, New York Attorney General Andrew Cuomo said he is expanding his investigation into the collapse of the auction-rate securities market to include JPMorgan, Morgan Stanley and Wachovia Corp. JPMorgan said in its filing with the SEC that it is cooperating with the investigations.

The bank estimated that as of Monday, its customers hold about $5 billion in face value of auction-rate securities bought before February of this year. Of that amount, retail customers hold $3 billion of the securities, JPMorgan said in the filing.

"If the company is forced by regulators to bring these $3 billion in auction-rate securities on its book, we estimate it might have to write down roughly $350 million in auction-rate securities losses," said Fox-Pitt Kelton analyst David Trone in a note to clients. Trone maintained an "In Line," or "Hold," rating and $45 target price on the stock.

Auction-rate securities have interest rates set periodically, depending on submitted bids. The securities were once considered safe, but investors' funds were frozen after the market for them collapsed in February following turbulence in the credit markets.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise, and a handful of banks, including UBS AG and Citigroup Inc., have already agreed to repurchase the securities at par value as part of their settlement with regulators.