On Wednesday, JPMorgan Chase & Co. (JPM) announced the redemption of variable maturity notes due 2025, having maturity value of $9 million.
The notes, having their maturity date on March 3, 2025, command a redemption price of 100% of the total amount. JPMorgan will start the redemption of these notes effective September 6, 2011.
Earlier in April, JPMorgan had redeemed zero coupon notes due in 2012 with a maturity value of $25.013 million. These notes, with their maturity date on February 8, 2012, commanded a redemption price of 108.1% of the total amount.
Earlier this week, another major financial institution, Morgan Stanley (MS) also announced the redemption of variable maturity notes due 2018 and 2023, having maturity values of $12 million and $2 million, respectively.
Earnings Recap
In July, JPMorgan reported second quarter 2011 earnings of $1.34 per share, way ahead of the Zacks Consensus Estimate of $1.21 as well as the year-ago quarter’s earnings of $1.09 per share.
Earnings for the reported quarter leave out certain significant non-recurring items, such as 15 cents per share benefit from reduced loan loss reserves in Card Services, a 12 cents benefit from securities gains in Corporate, additional mortgage related litigation reserves of 19 cents and an estimated 15 cents cost related to foreclosure matters.
Considering these items, JPMorgan reported net income of $5.4 billion or $1.27 per share, as against $4.8 billion or $1.09 per share recorded in the year-ago quarter.
The stellar numbers were primarily supported by a substantial slowdown in provision for credit losses and higher net revenue, which more than offset an increase in non-interest expenses and lower net interest income.
Estimate Revision Trends
Over the last 30 days, 3 out of the 22 analysts covering JPMorgan have lowered their estimates for the third quarter, while 1 of them moved north. Moreover, for fiscal 2011, 5 out of the 25 analysts have trimmed their estimates, while no upward revision was witnessed over the last 30 days.
Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of $1.22 per share, up 20.88% from the prior-year quarter.
Our Take
At this point, the redemption of variable notes would add to JPMorgan’s financial flexibility. Besides, the company’s efforts to enhance liquidity will also support growth plans.
We anticipate continued synergies for JPMorgan from a reduction in reserves for future losses, business diversification and steady capital deployment activities. However, the pressure on net interest margin due to a low interest rate environment, the effect of the foreclosure mess, as well as legal and regulatory challenges including stricter capital requirement, will drag down future earnings.
JPMorgan currently retains a Zacks #3 Rank, which implies a short-term Hold rating. Also, considering the company’s fundamentals, we maintain a long-term Neutral recommendation on the shares.
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