JPMorgan Shares Slip as BofA Cuts Rating for U.S. Recession

(Bloomberg) -- JPMorgan Chase & Co. stock fell as much as 5.8% in early trading on Friday after BofA cut its rating on the bank to neutral from buy and lowered earnings estimates to reflect recession in the U.S.

Analysts led by Erika Najarian see “at least two years of challenged EPS” for JPMorgan as the economic slowdown is likely to be followed by a “U-shaped recovery.”

Najarian cut her earnings-per-share estimates for 2020 by 24% and by 34% in 2021. Earlier this week, JPMorgan economists slashed their growth outlook for the U.S. economy for the first and second quarters after assessing measures to contain the coronavirus and bolster the economy.

Other bank shares also fell in early trading, with Citigroup Inc. and Bank of America Corp. shedding more than 6%, as stocks across the board halted a three-day rally. Earlier, U.K. Prime Minister Boris Johnson became the first world leader to say he has tested positive for coronavirus, while U.S. stimulus was set for swift passage in the House.

JPMorgan Shares Slip as BofA Cuts Rating for U.S. Recession

Higher credit provisions drove Najarian’s lower projections. Across banks, she expects “credit performance to be most challenged for unsecured consumer loans and C&I,” or commercial and industrial lending. For JPMorgan, she sees credit card net charge-offs rising sharply in the second half of this year.

Even so, she expects the bank will see fees rise 1% in 2020 and 5% in 2021, as its corporate and investment banking division “appears poised to continue its market share gains.” That includes a bounce-back in investment banking activity in 2021, and as “trading revenue is enhanced by market volatility and wider spreads.”

Earlier, analyst Susan Roth Katzke said that the strength of the trading environment shown in Jefferies Financial Group Inc.’s post-market results was consistent with what Credit Suisse has heard and expects from large-cap banks.

Jefferies shares fell as much as 6.8%. The bank’s executives said “quarterly results are all but ancient history, given the recent light-speed change in the economy and financial markets,” and warned that “there is little visibility on what can realistically get accomplished under current market conditions.”

JPMorgan kicks off the first-quarter bank earnings season on April 14. Wells Fargo & Co. also reports April 14, while Citigroup follows on April 15.

Separately, BofA analysts led by Ebrahim Poonawala shrank 2020 EPS estimates for mid-cap and small-cap banks by 46%, and cut estimates for the following year by 43%, to reflect “rising credit losses, lower net interest margins and a slowdown in customer activity.”

“While regulatory forbearance on loan modifications, delay in CECL implementation and the $2 trillion U.S. fiscal stimulus should all combine to alleviate some of the pain, it is highly unclear what the economy will look like” once some form of recovery gets underway, Poonawala said.

He also warned that “credit blind spots await investors,” who will need to assess an economic shock that’s expanded from the hospitality and leisure-related industries, to the energy sector, to commercial real estate, and to “practically any commercial enterprise that may struggle to make it through to the other side.”

Poonawala cut First Hawaiian Inc. to neutral from buy on Hawaii’s reliance on tourism, though he sees some “tactical investing opportunities,” flagging First Horizon National Corp.’s counter-cyclical businesses. First Hawaiian shed as much as 5%.

On Wednesday, Morgan Stanley also reduced bank EPS estimates, as the investment bank was now taking a recession into account in its base case.

Read more: Morgan Stanley Slashes Bank Estimates, Assumes a Recession

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