JPMorgan Chase (JPM) added a new wrinkle for investors in bank stocks to think about when it reported fourth quarter earnings this morning before the markets opened in New York.
Despite beating Wall Street earnings estimates by 20 cents a share (revenue at $23.65 billion was a little short of the $24.21 billion consensus forecast,) the stock opened down 1.6% this morning. As of 1:30 p.m. New York time the shares had moved up to a gain of 0.52%. Still not exactly the big move you might expect from a stock announcing $1.39 a share when analysts were expecting $1.19.
The problem lies in the company’s comments about its plans to de-emphasize returning capital to investors through stock buybacks in 2013 and instead to hold onto earnings in order to reach the 9.5% Basel III Tier 1 common ratio target set by global banking regulations by the end of 2013 rather than in 2014 or later. (The company’s estimated Basel III ratio was 8.7% at the end of 2012.)
Any delay or reduction in buy backs would leave the company’s share count closer to current levels. That would reduce the growth rate for earnings per share (since earnings would be spread over a larger number of shares.) And that would, in turn reduce target prices set by analysts for the shares. For example, Credit Suisse, which has a $54 a share target price for the stock, included $9.5 billion in share buybacks during 2013 in its calculations before today’s earnings announcement. After the company’s news, Credit Suisse said share buybacks could range from $2 billion to $3 billion a quarter during 2013. The lower end of that range would be significantly less at $8 billion in buybacks than Credit Suisse had earlier estimated.
This change in the buyback schedule wouldn’t matter so much except that bank stocks have been on a run recently. JPMorgan Chase, for example, was up 33.2% in the last 12 months before today’s earnings reports. When a stock doubles the performance of the Standard & Poor’s 500 Stock Index, it doesn’t take much to raise a doubt or two among investors.
And today those doubts aren’t limited to just JPMorgan Chase. If this bank, one of the best capitalized of U.S. banks, sees a need to retain more in earnings, you have to ask what changes in buybacks and dividend payouts we might expect from less well capitalized banks such as Citigroup (C) and Bank of America (BAC)? Those two banks report earnings tomorrow, January 17, before the market opens in New York.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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