Weak Capital Markets Being Felt by JPMorgan Chase

JPMorgan Chase & Co. expects capital markets activity, both debt and equity, to decline by 30 percent and investment banking fees to decline to $1 billion in third quarter of 2011 from $1.9 billion last quarter.

JPMorgan expects asset management revenue to come in modestly lower than the previous quarter's $2.5 billion. Private equity is expected to record a loss of about $100 million, while the corporate unit is expected to record another large litigation reserve, which RBC Capital Markets estimate to be over $1 billion.

Excluding the Private equity loss and the litigation reserve, the corporate unit is expected to record a small loss.

“We believe the large increase in ligation reserves stems from the continued mortgage-related problems the company and the industry are experiencing. We anticipate litigation reserve building will remain elevated deep into 2012,” said Gerard Cassidy, an analyst at RBC Capital Markets.

He anticipates that lower capital markets revenue will be felt by all companies with investment banking exposure. As a result, earnings estimate reductions for other capital markets players will likely be widespread over the next 2-3 weeks, in his view

The brokerage lowered its 2011 third quarter EPS estimate for JPMorgan to $1.02 from $1.27, its 2011 estimate to $4.98 from $5.27 and its 2012 estimate to $5.06 from $5.85.

Cassidy reduced his estimates due to lower than expected capital markets revenue based on the company's guidance provided on Tuesday.

As a result of the global uncertainty, he has lowered his price target on shares of JPMorgan to $50 from $54, while maintaining his “outperform” rating.

“Although the stock has underperformed in 2011, we continue to believe investors should purchase it. In our view, the stock is undervalued and the long-term outlook for the company remains favorable due to its strong market positions in capital markets, asset management, asset servicing, corporate banking, and credit cards,” said Cassidy.

JPMorgan stock is trading down 0.46 percent at $32.34 on the NYSE at 10:11 am EDT.