JP Morgan Earnings Preview: Trading Loss to Be Quantified
J.P. Morgan Chase (NYSE: JPM) is expected to report second quarter earnings of $0.78 on Friday, July 13, before market open - a nearly 40 percent decline from the same period last year. J.P. Morgan will also give an update on its trading loss and the expediency of the winding down of losing positions in the conference call.
Analysts have been trying to figure out the exact size of the trading loss at J.P. Morgan as the bank has been rather discreet with specifics. When first reported by the bank, the trading loss was around $2 billion. That number had nearly doubled in the month after. An analyst at ISI estimated the losses to be as much as $9 billion, however, many expect the real number to be somewhere between $4-6 billion.
In the second quarter of 2011, J.P. Morgan reported net income of $3.7 billion, so the trading loss could well wipe out any profits should they swell to this level. However, due to the fact that J.P. Morgan's debt and CDS spreads have widened, the company will be able to book a gain due to the Debt Valuation Adjustment ('DVA'). This accounting mechanic allows banks to book losses on their own bonds as gains as the cost of buying them back in the open market falls. These gains must eventually be reversed as bonds mature at par.
Friday also marks the deadline for J.P. Morgan to turn over documents relating to the energy market manipulation charges that were levied against the bank in June. It will also be interesting to see if CEO Jamie Dimon comments on the recently escalated Libor rigging scandal, as it has already cost Barclays (NYSE: BCS) CEO Bob Diamond his job and has led to trader layoffs at Deutsche Bank (NYSE: DB).
According to Bloomberg, J.P. Morgan is expected to report adjusted EPS of $0.78 on sales of $21.736 billion. ROE is also expected to be reported at 7.402 percent.
Disclosure: I am long JPM
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