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Brokers: JPMorgan Faces Tough Time Restoring Credibility

Friday, 11 May 2012 01:29 PM

JPMorgan Chase & Co., the biggest U.S. bank by assets, will be able to manage the $2 billion loss from a hedging program that backfired but analysts said it may take far longer to repair the damage to its credibility as a risk manager.

JPMorgan shares were down 8 percent at $37.39 in premarket trading on Thursday, a day after it said its chief investment office had racked up big mark-to-market losses in its synthetic credit portfolio.

"This is a well-owned stock due to the confidence investors have in the JPM risk (management) and some of that confidence was lost yesterday," Citi analysts said in a note to clients.

Bernstein analysts termed the loss a "big credibility hit" for the lender, which takes pride in its strong risk management.

Citi cut its share price target to $45 from $52, Nomura to $50 from $55 and Goldman Sachs to $48 from $50. FBR Capital Markets lowered its rating on the stock by a notch to "market perform."

JPMorgan sailed through the financial crisis without reporting a loss, and its strong balance sheet allowed it to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.

The bank had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March.

Goldman Sachs said that while the direct impact of the loss was manageable, the broader implications were negative, as they highlighted an unfavorable operating environment and raised questions about regulatory scrutiny.

"To regain (credibility), we think JPM needs to go further to explain to investors conceptually how this could happen on such a large scale and the resulting changes that are going to be made," the Citi analysts said.

FBR said that although core business lines remained strong and intact, the potential risk the credit derivatives portfolio posed to future earnings was a worry.

"Until the company is able to unwind this portfolio, there is little clarity into and a lot of uncertainty surrounding JPMorgan's future earnings," FBR said in a note to clients.

© 2018 Thomson/Reuters. All rights reserved.

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Friday, 11 May 2012 01:29 PM
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