Updating Estimates for Mortgage Repurchase Adjusting Estimates for $BAC, $JPM, $WFC and $PNC

Updating Estimates for Mortgage Repurchase
Adjusting Estimates for BAC, JPM, WFC and PNC

• Mortgage Repurchase Impact — In conjunction with the report published today titled: “US Banks: Mortgage Repurchase Risk: Mkt Concerns for Bank Reps & Warranties Risk Seem Overdone” we are reducing our estimates for the mortgage repurchase reserve headwind expected to continue into 2010. In this companion note we analyze the mortgage repurchase risk in depth and estimate $20 bil of remaining mortgage repurchase reserve risk for the banking industry, and $15 bil for the 6 banks in our coverage universe.

• Bank of America — We are reducing our 1Q10 estimate by $0.05 to $0.06 to incorporate mortgage repurchase hit of ~$550 mil. We estimate a mortgage repurchase headwind of ~$2.3 bil in 2010 vs. $1.9 bil in 2009. We are also reducing our investment banking estimate due to lower volumes in the quarter. We are reducing our 2010 estimate by $0.15 to $0.50 (and 2011 by $0.05 to $2.00) to reflect mortgage repurchase costs.

•JP Morgan — We trim our 1Q10 estimate by $0.04 to $0.60 (vs consensus of $0.64) with mortgage repurchase expenses of $1-1.5 bil in 2010 (vs $1.6 bil in 2009), which we see falling to $400 mil in 2011. Given muted primary I-banking volumes and a tougher environment for equity trading YTD, we also trim our 1Q10 I-banking revenue estimates by $900 mil to $7.7 bil. We also reduce our full-year 2010 estimate by $0.10 to $2.70 (vs cons of $3.00) due mostly to mortgage repurchase costs. Our 2011 estimates remain unchanged at $5.15 (vs consensus of $4.73), and we continue to see $6.50 of normalized earnings power (adjusting for normal capital structure).

• Wells Fargo — We are reducing our 1Q10 estimate by $0.03 to $0.46 (vs. consensus of $0.41) to take into account continued mortgage repurchase costs. We estimate mortgage repurchase costs of $1-1.5 bil in 2010 vs. $930 mil in 2009. We are lowering our 2010 estimate by $0.20 to $1.80 to reflect headwinds
from mortgage repurchase (~$0.15) and NSF/overdraft regulation (incremental $0.05). We are also reducing 2011 by $0.15 to $2.70 and 2012 by $0.10 to $3.15 to reflect mortgage repurchase and NSF/overdraft impacts.

J.P.Morgan Chase & Co. Credit Improvement Playing Out; Most Bullish Price Target of $61 +28% $JPM

Investment Thesis
•We are Overweight JPM given its earlycapital markets and card businesses and stronger risk management relative topeers and strong capital levels.
•Accretion from the WM acquisition driveshigher earnings growth going forward.
•Expect JPM’s stronger balance sheet willenable it to take share.

Key Value Drivers
•Card – Declining early stagedelinquencies should lead to modestreserve release and losses peaking inearly 2010
•Retail - Declining early stagedelinquencies should lead to lowerreserve build and losses peaking in early 2010
• Investment Bank - Taking share withinvestment spending in IT and fill-ins(Sempra) and as clients access its strongbalance sheet.
• TSS- Benefiting from volatility in capitalmarkets

Potential Catalysts
• Card NCO decline
• Continued reserve release
• Improving market share gains in capitalmarkets activities
• Efficiency improvements in higher marginconsumer loans

Todays TOP Stories 04/12/10

Todays TOP Stories by theback9 04/12/10

• Greece - the big story over the weekend being the announcement by Eurozone governments of a loan package for Greece worth at least EU30B (US$41B). From JPM’s D. Mackie – “In our view, the support mechanism should work in the sense of limiting both near term liquidity stress on Greece and contagion in the rest of the region. But, the medium term issue of debt sustainability remains.” JPMorgan’s J. Normand comments re the loan that “These terms are good but not great.”
• Greece - Luxembourg PM Junker told reporters on Sunday that “this is a step of clarification that markets are waiting for – it shows there is money behind this”. A “loaded gun” to ward of speculators is now “on the table” according to Greece’s PM. The agreement came about after Germany dropped its opposition to subsidies for Greece lending. Greece has not asked for aid from its euro zone peers, a German government spokesman said on Monday, adding that a summit of European leaders would be needed to activate a financial rescue mechanism agreed for Athens; "Just because I have a fire extinguisher on the wall doesn't mean I'm going to use it," (an EU spokesman denied the German comment about a summit being required….. "No. We do not have to organise a big summit here in Brussels. As you saw yesterday, the euro group can activate itself in a very quick, effective ... way.". Bloomberg/Reuters
• Spain - Spain’s PM told the FT this weekend that the country will implement its economic austerity plan to cut its budget deficit “whatever the cost”, and will introduce even harsher measures if necessary.
• Poland - Polish president Lech Kaczynski and other high ranking officials from the country were killed in a plane crash (the president of the National Bank of Poland, the army chief of staff and the Deputy Foreign were also on board the plane – WSJ).
• China - A few China datapoints out overnight inc. 1) March Trade balance came in as a deficit as was expected but the magnitude was greater than the St. was looking for (-$7.24B vs. St. -$0.39B), 2) Chinese banks extended a less-than- estimated 510.7 billion yuan ($74.8 billion) of new loans in March, and 3) China’s FX reserves rose at a slower pace in Q1 vs. Q4 (+$47.9B vs. +$127B). Re the Yuan and a potential devaluation, Chinese officials pointed to the March deficit as evidence to refute claims that the yuan level was distorting economic relationships and PBOC governor Z. Xiaochun said he doesn’t know where the NYT received its story about an imminent revaluation last week. Property Developer shares were weak in Asia after a top China bank regulator said the country's banks must do more to rein in risky lending to land developers (Reuters) with some banks in Beijing “voluntarily and prudently” raising down-payment requirements for second mortgages to 60% of a property’s value.

International Headlines , China and the yuan,Xi Jinping says" the country must emphasize domestic consumption"

International Headlines

• China’s trade deficit comes in larger than forecast - Trade balance turned red in March, posting the first deficit since May 2004 at US$ 7.24bn (JPMorgan: -$2.3 bn; consensus: -$0.39 bn). We think the deficit will only be temporary. Seasonally adjusted, trade deficit came in more modest at $0.6bn. March exports rose 24.3% over-year-ago (JPMorgan: 28.2%; consensus: 26.9%), translating into a significant fall of 7.2%m/m, sa. This comes on the back of the strong 5.9%m/m, sa monthly average pace of expansion since December09, with the sequential trend growth moderating to a still decent level of 39.2%3m/3m, saar by March. We believe the decline last month represents some payback to earlier gains, rather than reverses the solid recovery trend in overall exports. Meanwhile, imports also rose notably at 64.7%oya in March (JPMorgan: 64.1%; consensus: 55.7%), translating into a 6.0%m/m, sa gain, though the sequential trend similarly moderated to 66.5%3m/3m, saar through March. 

·         China and the yuan – China reported a trade deficit over the weekend (as was expected), which officials from the country pointed to as evidence to refute claims that the yuan level was distorting economic relationships.  The official Xinhua News Agency cited Yao Jian, a commerce ministry spokesman, as saying the March trade deficit “proves” that the level of the renminbi was not the “decisive” factor that caused trade imbalances.  FT  

Financials Update $BAC $MS $GS $STT $XLF

· Financials Update for the week – there was some expectation that the financials, esp. the banks, would cool their rapid advance as Q1 came to an end; however, this hasn’t happened and the group has continued its very strong march higher. The banks are up ~5% on the week and are up ~29% YTD. After posting the best performance of any major group in Q1, buyers continued to allocate to the group ahead of the kick-off to earnings season. There weren’t many specific catalysts for the rally, but rather a confluence of events. There is a bit of performance anxiety in the group, as the space remains relatively underowned and gains have been so strong. The desk noted that some larger MFs are starting to increase their allocations. There were a couple of bullish articles written this week on the state of commercial real estate (focusing on multi-family and office; retail still seems to be struggling), which has helped provide a bid to the smaller regional banks (keep in mind that a lot of the CRE exposure is concentrated in the regional banks). There has been a dramatic rally in the MI/financial guarantor space, reflecting the recent mortgage mod announcements (BoA, Treasury) and general optimism around resi real estate. ABK posted earnings Thurs night and the stock saw a dramatic short squeeze on Fri (recall the co delayed its earnings a few weeks back and warned of a potential bankruptcy filing). On the regulatory front, the smaller/mid-cap regional banks are viewed as having less exposure to any new rules that may come out of Washington (the most intense focus has been on activity in investment banks).

Today’s Top Stories; #GREECE #IMF $EWG $SPY $AA

Today's Top Stories

·         Greece continues to receive a lot of attention in the press with the country planning to push ahead w/a planned US$-denominated debt sale later this month despite a recent spike in yields according to officials and Reuters is reporting that Greek's central bank is taking actions to limit short sales of its gov't debt.  Greece's Finance Minister says the country isn't asking for an activation of the aid mechanism (although there is rampant speculation that activation could come soon) but EU president Herman Van Rompuy said aid to Greece must be made operational and talks are currently under way on the technicalities of implementing the plan (Bloomberg)

·         Greece – update from JPMorgan's D Mackie - With government bond yields having risen sharply over the past week, and concerns about market liquidity and deposit outflows from the banks mounting, we are likely getting close to the point when the Greek government will ask for the EU/IMF support mechanism outlined two weeks ago to be activated. 

·         A few stories out on the China front – 1) the chief economist at China's State Information Centre think-tank said China might increase interest rates as early as this month, but Beijing will probably not resume yuan appreciation as soon as that (China reports its March Trade Accounts tomorrow and St. is looking for a $0.4B deficit which could weaken arguments that the nation is keeping its currency undervalued to gain an advantage), 2) China's finance ministry failed to draw enough demand at sales of 273-day and 91-day treasury bills today

Catalysts to Watch Economics calendar – daily view March 30, 2010 $SPY

Catalysts to Watch
• JPMorgan is hosting a REIT conf on Thurs Apr 1.
• Treasuries – we will hear about the size of the next round of coupon sales on Thurs Apr 1. The next coupon sales are: 10yr TIPS Mon Apr 5, 3yrs Tues Apr 6, 10s Wed Apr 7, and 30s on Thurs Apr 8. 
• C, PRI – Primerica expected to price after the close on Wed according to the FT
• Auto sales due Thurs; Industrywide deliveries may have risen to an annualized rate of 12 million light vehicles, the average of eight analysts’ estimates compiled by Bloomberg. Toyota said yesterday its sales climbed as much as 35 percent (Bloomberg)

Economics calendar – daily view
• Wednesday, Mar. 31st: Overnight: China PMI Manufacturing & HSBC Manufacturing PMI, Japan Tankan Survey.
• Thursday, Apr. 1st: US (Challenger Job Cuts, Jobless Claims, ISM Manufacturing/Prices Paid, Construction Spending, Auto Sales); Eurozone (German Retail Sales, UK PMI Manufacturing); Other (Australia Trade Balance, Switzerland SVME PMI).
• Friday, Apr. 2nd: US (Monthly Labor #s, Unemployment Rate); Eurozone (n/a); Other (n/a). The jobs number will hit on Fri morning despite equities markets being closed for Good Friday; note that the TSY market will be open for a half session on Fri. JPMorgan’s B Kasman will be hosting a conf call Fri at 10amET to review the jobs report.
Corporate Events Calendar
• Wed Mar 31: Earnings after the close (XRTX, MU, RIMM, MOS, RECN, GPN, DMAN). GENZ to Host Investor Event on Its Manufacturing Operations; company will host Webcast today at 1:00 p.m.
• Thurs Apr 1: earnings before the open (WOR, KMX, SCHL). sales (the nation’s auto companies will release their sales results for the month of Mar). Analyst meetings (HIG).
• Fri Apr 2: most major markets closed for Good Friday (US, Germany, Greece, UK, Hong Kong, France, etc).

Greece’s 7yr sale on Mon continues to trade poorly in the secondary market…

         Greece's 7yr sale on Mon continues to trade poorly in the secondary market…according to the FT today: Greece still has big problems," said a senior banker. "The Greek bond syndication was very disappointing. Investors still do not have faith in Greece and are only prepared to buy the bonds for higher yields." (FT) 

SP500 technical update 02.18.10

· SP500 technical update – from JPMorgan’s M Krauss - Another firm day with decent
breadth, as the S+P is entering the first key resistance in the post-1044.50 Feb 5 low rally.
These ST upside targets are 1097 (Jan 19 50% retrace), 1105 (Feb 2 peak), and 1110 Jan 19
61.8% retrace). Be careful of a failure, as that would imply a retest, if not a 1029-1019 lower
low in March. Medium term resistance rests at the 1115 Jan 22 flush, and 1130 Jan range
break. The 1150.45 Jan 19 peak neared four big targets at 1145-1159. Short term support
rests at Tues’ 1076.75-1079.13 bullish hourly gap up. Last week based above 1060, after Feb
5 held the 1043 July 38% retrace/4th-wave obj. Created strong daily momentum bullish
divergences, amid pessimistic sentiment measures. Upside reversal month in Feb above
1074. MT support: 1035 10% drop, 1029 Nov low, 1026 Jan-Feb c=a, 1026 200 day MA, and
1019 Oct trough. Our 2010 Outlook suggests a range view between 950-1000 and 1150-
1200, with a best case to 1229/1240.

2.18.10 Today’s Top Stories & Catalysts

Today’s Top Stories & Catalysts

· Focus for the most part remains on Europe with little out of Asia (BoJ decision pretty
much as expected and HK’s unemployment rate was unchanged) as China remaining closed.
On the Greek front, no major developments to speak of overnight (to watch coming up
though: the FT is reporting that Greece may test the waters next week w/a bond offering and
the country is expected to deliver more information by Fri 2/19 on its debt swap deals).
There were a handful of earnings out in Europe - Daimler is prob. the standout, w/the
stock off ~7% after reporting disappointing numbers and proposing a dividend cut. SocGen is
down 5% post its earnings (first disappointing European financial report this week after very
strong Barclays and ING #s) although other European financials aren't really getting hit in
sympathy. In London, BT is the weakest stock in the FTSE following a ratings downgrade
from S&P (there are continued worries about the co's pension exposure). On the eco front,
the UK posted a budget deficit for January vs. expectations for a surplus, putting UK
sovereign debt under some pressure (FT).

· tech update from Wed night - big night of earnings - on the whole numbers/trends/mgmt
commentary all remain positive, although inline w/what we heard from companies back in Jul
and also inline w/CSCO's Chambers a couple weeks back. Trends were robust in the CQ4,
trends remained strong in Jan, the CQ1 is shaping up to be better-than-seasonal for many endmarkets,
and mgmt tone remains sanguine on the outlook. The next big catalyst for tech will
be the sell-side conference season and the mid-Q updates - Goldman has a conf next week
and Morgan Stanley the week after - these forums will give companies a chance to update on
the status of Q1 (i.e. are things still pacing better-than-seasonal; how is the outlook for June
shaping up; etc). Also - we will start getting formal mid-Q updates in early Mar. Some
tidbits from Wed night: 1) HPQ tone remains positive on demand; PCs prob. showed biggest
upside (revs much better than St), which isn't surprising given what others have said/reported
(MSFT, INTC, etc); HPQ mgmt said it was component constrained (similar to what others,
inc. CSCO, have said); 2) AMAT beat and raised; tone was positive; one analyst on the call
noted that backing into CH2:10 guidance based on mgmt's color implies a down back-half (if
I take the 25% revenue growth you gave in the April quarter, 100% year on year growth, I
think you are actually talking about a 50% revenue decline from the April quarter level into
July and October"); that said AMAT was sanguine on the outlook looking into ’11; 3) NVDA
said it remained capacity constrained throughout the Q and will remain so into the Apr-end Q
(NVDA said this cost them a couple hundred million in revs in the Q and that they would
have guided for higher Apr revs). Big to watch tonight in techland - DELL and IM earnings.

· Gold sales - IMF to Begin On-Market Sales of Gold – hit after the US close on Wed – IMF
said Wed night it will soon kick off the second phase of its gold sales process. The first
phase was set aside exclusively for off-market sales to official holders. The total amount
remaining to be sold is 191.3 metric tons. In accordance with the priority of avoiding
disruption of the gold market, the on-market sales will be conducted in a phased manner over
time.

· China & US tensions growing on economic front - US officials increasingly view the
Chinese currency’s artificially low peg as a threat to worldwide economic stability; the US
plans to press Chinese officials in the coming months to take action and strengthen the yuan.
In addition, US multinational corporations are becoming increasingly vocal about what they
view as anti-competitive practices on the part of the Chinese – WSJ

· Muni market – cities weigh Chapt 9 filings – the WSJ says municipalities around the
country are considering whether to file for Chpt 9 bankruptcy protection; also on the muni
front: States see ~$1T benefits “sinkhole” (there is a massive gap between what states have
promised in pensions, health care, and other benefits, and the available resources)
· Retail earnings season kicks off – WMT earnings due to hit @ 7amET this morning; JCP
comes Fri morning.

· US bank lending falls at fastest rate in history – bank lending in the US has contracted so far in ’10 at the fastest rate in history, raising worries that the Fed is withdrawing its
emergency stimulus measures too early. The M3 broad money supply has been contracting at
a rate of 5.6pc over the last three months. This signals future deflation. London Telegraph.

· Earnings season recap – from JPMorgan’s E Beinstein - Roughly 75% of the non-financial companies in our High Grade bond index have filed their 4Q09 reports. This preliminary data suggests credit metrics continue to improve, but the complexion of the improvement has changed. Recall, trends in 3Q09 credit metrics were positive across almost all sectors. These trends continue in 4Q09, but with a different tone. While companies continue to accumulate cash, the pace is slower. With cost cutting largely finished, profit margins have ticked down as companies must spend more to grow. While leverage has likely peaked earlier in 2009, its reduction will likely be gradual.

Barclays Report

Image via CrunchBase

• Barclays reported PBT of £11,642mn fully in line with our estimates
of £11,626mn and 2% better than company consensus. Underlying
PBT came in at £11,720mn a 5.7% beat to JPMe of £11,090mn
adjusted for: (i) total write downs of £6,086mn; (ii) loss on own debt
of £1,820mn; (iii) £6,579mn gain on sale of BGI and others; and (iv)
£1,249mn gain on exchange offers. Note that we have not adjusted
earnings for a £1,162mn gain from a structural equity hedge and
£1,364mn from an interest rate hedge.

• We have focused on three main areas;

• Resilient revenues at BarCap – PBT was in line although revenues
were better than expected, especially relative to their IB peers. Q4
revenues came in at £3,673mn (JPME £3,339mn) flat on Q3 whereas
IB peers have seen this fall on average by c.30%. We suspect this is a
result of strong origination volumes. Total write downs were slightly
higher than what we expected but they made up for it on the expense
line with a clean cost to income ratio of 42% in Q409 compared to
50% in Q3. BarCap reported a comp ratio of 38% in Q4.

• Provisions better than consensus and company guidance -
Provisions came in line with our estimates at 135bps of average loans
compared to guidance of 130-150bps. Going forward we expect a
13% absolute decline in this number.

• Capital came in better – RWAs fell by more than expected to £383bn
(-6% HoH). As a result core Tier 1 ratio came in better at 10% and we
have adjusted our RWAs estimates going forwards.

• Valuation – We increased our SoP based PT from 280p to 305p to
reflect a better capital position and improvement in earnings. Our new
stated NAV for 2010E is now 352p (old 330p) and JPM adjusted NAV
286p (old 265p) which implies Barclays is trading on 0.8x 2010E
NAV. Barclays (N) remains our favourite UK domestic bank.

FULL REPORT HERE

U.S. Federal Reserve is holding sizable paper losses on real estate assets acquired in the Bear Stearns rescue

Image via Wikipedia

LONDON (MarketWatch) -- The U.S. Federal Reserve is holding sizable paper losses on real estate assets acquired in the Bear Stearns rescue, the Financial Times reported Tuesday. The assets are held in a vehicle known as Maiden Lane I, which was set up to facilitate JPMorgan Chase's /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 39.28, +0.20, +0.51%) purchase of Bear in March 2008, the newspaper said. The assets were originally valued at $30 billion when a final agreement on the portfolio was reached in June 2008 by the New York Fed and its advisers, the newspaper said. At the end of 2009, the Fed said the assets were worth $27.1 billion. The report said Maiden Lane's losses were concentrated in commercial real estate assets, which had a face value of $8.4 billion and an estimated worth of $7.7 billion when acquired by Fed. They were marked down to $4 billion as of September, according to the report.MarketWatch