20081013-Citi-JP Morgan Chase & Co (JPM)

3Q08 Earnings Preview
 3Q Takeaways — The key takeaways from the third quarter are likely to be
reduced 2008/2009 EPS expectations due to the challenging economic
environment, but we believe there are also likely to be several positive signs,
including increased market share across JPM’s key businesses that actually
improve the firm’s longer term outlook – which is why we are maintaining our
$40 target price despite lower EPS estimates.
 3Q Results Likely To Come In Lower Than Consensus — We now see a ($0.32)
per share loss in 3Q (vs. consensus of a $0.16 loss) to reflect our estimates of
$3.2 billion of reserve build as well as $3.4 billion of net mark to market hits –
including a $3.5 bil mark for mortgage and leveraged loans, $1.2 bil for
FNM/FRE preferred security write-downs and $400 mil for auction rate
securities; offset by a $700 mil APB 23 accounting gain and ~$1 bil gain from
wider credit spreads on JPM’s fair valued liabilities. JPM’s 3Q guidance
includes ~$2.7 bil in specific reserve builds, we see ~$3.4 bil or reserve build
overall in 3Q – our est’s include an additional $300 mil in card and an extra
$350 mil in RFS on top of guidance to further bolster home equity (by $200
mil) and auto allowances (by $150 mil).
 Also Taking Down 2009 EPS Estimate — We are also taking down our 2009
EPS estimate by $0.25 to $2.70 (vs. consensus of $3.45) to reflect more
conservative outlook on credit and reduced outlook for investment bank
(assuming ROE of roughly 10% in 2009 and then 13-15% in 2010).
 JPM Benefiting from Flight to Quality —We expect core deposits (ex WM) will
be up 15% LQA given and see 4% loan growth LQA. Our 3Q deposit survey
indicates JPM will also post strong retail account growth, and going forward we
believe JPM stands to benefit from market share gains share in its trading, IB
and advisory businesses.