JPMorgan’s size and scope makes it a bellwether for financial companies worldwide, as they wonder whether bank stocks will grow in the months to come.
As a new wave of corporate earnings reports begins this week in the United States, investors will be watching JPMorgan Chase & Co. for clues about whether the nation's battered banking stocks have room to grow in 2012.
JPMorgan's size and scope makes it a bellwether for financial companies worldwide. The second-largest U.S. bank is forecast to report a year-over-year fall of about 17 per cent in fourth-quarter earnings per share, according to equity analysts surveyed by Bloomberg.
Analysts cut their estimates a month ago after the bank's chief executive officer Jamie Dimon said that investment-banking revenue would be "essentially flat" from the third quarter.
Investment banking – comprising stock and bond underwriting and trading, as well as merger advice – was the biggest contributor to profit in the third-quarter among JPMorgan's seven business units, and analysts had been expecting a more robust recovery in the unit's results.
The New York-based firm reports earnings on Friday at 7 a.m., and comments by Mr. Dimon and other top executives will show whether sentiment is rebounding from last year, when surging volatility drove investors out of stocks and into the perceived safety of U.S. government bonds and the dollar. Mr. Dimon is expected to discuss his outlook for retail and investment banking in the context of a sluggish U.S. economy, Europe's debt crisis and calls for stricter banking regulations and higher capital ratios.
Despite the expected fall in earnings, analysts are relatively optimistic for bank stocks in 2012 after a horrendous 2011. They've assigned JPMorgan the highest average rating among the 30 companies in the Dow Jones industrial average, according to data compiled by Bloomberg.
"We believe fourth-quarter 2011 results should continue to demonstrate measured fundamental improvement for bank stocks despite myriad macro headwinds," Gerard Cassidy and Jake Civiello, analysts at RBC Dominion Securities Inc. in New York, said Friday in their earnings outlook for banks.
U.S. financial companies fell the most last year among the 10 industry groups in the S&P 500. JPMorgan tumbled 21.6 per cent in 2011, the fourth-biggest decline in the Dow Jones, and Bank of America Corp. took the top spot with a plunge of 58 per cent.
"There is no arguing the fact that banks significantly underperformed the general market in 2011, but we continue to believe that investors should buy bank stocks as we anticipate the underlying fundamental improvement in the group will continue throughout 2012," the RBC analysts said.
Last year's brutal decline in the share prices of U.S. financial companies drove down valuations in the sector to levels that are too good to pass up, according to some analysts. The average price-earnings ratio for financial stocks overall dropped last month to its lowest level since March 2009.
JPMorgan's P/E sank to 5.5 in late November, the lowest since at least 2000, according to Bloomberg data. At last week's close of trading, its price-earnings ratio stood at 6.8 times earnings, about half the level of the S&P 500.
"At current valuations, we believe the risk of not owning U.S. bank stocks is greater than owning them," Jason Goldberg and fellow analysts at Barclays Plc said in a report last week. "Looking at 2012, we see several potential positive catalysts." Those include an easing of the euro zone debt crisis and a healthier U.S. economy, the analysts said.