.P. Morgan falls on warning
By Deborah Adamson, CBS.MarketWatch.com
Last Update: 8:04 AM ET Sept. 18, 2002
NEW YORK (CBS.MW) -- J.P. Morgan Chase shares fell Wednesday after the nation's second largest bank warned that third-quarter earnings would fall "well below" the second quarter's performance, stung by credit losses and a plunge in trading revenue.
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J.P. Morgan (JPM: news, chart, profile) said the third-quarter's profits would be much lower than the 58-cent-a-share profit posted in the prior quarter.
Wall Street was expecting profits of 54 cents a share for the current third quarter, according to Thomson First Call. Listen to bank executives speak
JP Morgan was at $19.44 in euro trading and marked at $19.50 in London. The stock closed at $21.55 and sank to $19.80 after warning on the third quarter.
Analysts reacted by cutting estimates for Morgan, and ratings agency Fitch Ratings downgraded the bank's debt.
"We had braced ourselves for a tough third quarter and (Tuesday's) pre-announcement - although it lacked a lot of detail - certainly indicates extreme weakness," Lehman Brothers told clients.
Lehman whacked its forecast to 38 cents a share for the third quarter from 58 cents, and dropped its price target on the stock to $23 from $31. Merrill dropped to 7 cents a share for the third quarter from 55 cents earned in the year-ago quarter.
CS First Boston told clients overnight "an operating loss cannot be ruled out." The broker had a 50-55 cent a share range estimate; it lowered that forecast to 0.00 cents a share for the third quarter "incorporating much higher credit costs and much weaker trading profits."
"We assume the third quarter will prove to be an unusually bad quarter, but JP Morgan faces several issues that may not go away," Merrill's Judah Kraushaar told clients.
Fitch cut the bank's short-term and long-term debt and deposit ratings following the news, while maintaining its "negative rating outlook" on the investment bank. The debt-rating agency cited weakness in a number of J.P. Morgan's key businesses, plus an expectation that business conditions will continue to be tough. Fitch noted that "a fairly significant portion" of earnings is "very market-dependent."
The financial institution said commercial credit costs soared in the quarter to $1.4 billion compared with $302 million in the second.
A credit portfolio still concentrated in the troubled telecom and cable sectors cut into the bottom line, the company said. As a result, the current quarter will see "significantly higher" charge-offs while the level of bad loans should rise by $1 billion, as well.
The "adverse actions" of several telecom and cable companies affected J.P. Morgan's commercial loan portfolio in the quarter. However, the credit quality for the rest of the companies in the portfolio "hasn't changed significantly" since the end of 2001.
Meanwhile, the bear market and a seasonal slowdown have slashed trading-related revenue. In the first two months of the third quarter, business from this activity came in at $100 million compared with $1.1 billion in the second quarter.
Offsetting the lower trading activity was an investment gain of $300 million in the first two months of the third quarter, reflecting J.P. Morgan's interest rate management activities.
"We are very disappointed with these results," said CEO William Harrison Jr., in a statement. "As much as we have focused on reducing credit portfolio concentrations in recent years, it is clear that further reductions are necessary ... Additionally, the company will continue to focus on managing expenses to adapt to current market opportunities," he said.
Also, the bank declared a 34-cent dividend payable on Oct. 31 to shareholders of record as of Oct. 5. J.P. Morgan said it expects to maintain the current dividend level, providing capital ratios remain strong and earnings exceed the dividend payout.
Fitch noted that dividend payouts have been taking up more than two-thirds of earnings, as profits have fallen, "leaving little in the way of excess profits to build capital or support growth." But the bank's capital levels are enough for current business needs and "comfortably" exceed regulatory requirements, Fitch added.
Deborah Adamson is a reporter for CBS.MarketWatch.com in Los Angeles.
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