Updated with report on analyst downgrade.
NEW YORK (TheStreet) — Shares of JPMorgan Chase(JPM) were down more than 2% Monday afternoon after CEO Jamie Dimon said the bank will suspend its share repurchase program at an investor conference.
The announcement prompted a downgrade from Evercore Partners analyst Andrew Marquardt from overweight rating to equal weight.
JPMorgan shares are likely to be in he “penalty box for longer than originally expected,” the analyst wrote in a note following the conference, with buybacks off the table and the likelihood that the recently disclosed losses from the bank’s chief investment office might be larger than originally estimated.
JPMorgan had approval from the Federal Reserve to purchase up to $15 billion in stock- $12 billion in 2012- after it passed the regulator’s annual stress test with flying colors.
It also received approval to raise its quarterly dividend by 5 cents to 30 cents per share.
Dimon said at the annual meeting the bank “hopes” to maintain its dividend, but clarified Monday that the bank fully intends to maintain its dividend. He added that the decision to halt buybacks should not be used to make interpretations of the likely size of the bank’s recent trading loss and that JPMorgan simply wanted to remain on a “glide path” to attaining the regulatory capital targets under Basel 3.
The bank will likely restart the buyback program but won’t say when. Dimon said the bank wanted to “box this thing” first.
Marquardt believes regulators might have played a part in the bank’s decision to halt buybacks.
JPMorgan jolted investors recently when it said its chief investment office had lost $2 billion in the first six weeks of the second quarter on account of a botched attempt to hedge against credit risk. The bank also said losses could climb as it tried to unwind its large trading bets.
Some analysts have maintained their buy recommendations on the stock on the hopes that the bank’s buyback program will offer some support to the share price.
Citigroup analyst Keith Horowitz earlier on Monday issued a buy rating on the stock ahead of the conference. “We would hope [for] a very clear statement that [the] dividend is not at risk and that buybacks are still expected in 2012.”
Horowitz wrote that the size of JPMorgan’s trading loss “relative to the earnings power is manageable, which is why we would not expect the dividend to be cut and why we still see buybacks in 2012,” and that the “bigger question is how aggressive they will be in their buybacks. While we do not have large buyback assumptions in 2Q, we still see $4 billion of buybacks in 2012.”
But with the announcement that it will suspend buybacks, Evercore’s Marquardt believes the thesis for an overweight rating on JPMorgan has been challenged.
The analyst sees lower contribution to profits from the CIO unit going forward, with higher expenses due to regulatory inquiry and overall higher scrutiny adding pressure to the bottomline.
The year-end 2012 earnings estimate dropped to $4.24 from $5.11 wile 2013 estimate was lowered to $5.21 from $5.62. The analyst also dropped the 12-month price target to $37.
In a question and answer session with analysts Monday, Dimon acknowledged that the recent losses were an “embarrassment”. He also admitted that the CIO unit did not get as much attention as it should have, which was “a risk 101″ mistake.
He backed away from putting a number on the size of the potential losses.
Still, the CEO continued to tout the bank’s fortress balance sheet, which he said was “barely nicked” by the recent losses. He also said the bank continued to be rigorous in its risk management practices.
“We are risk averse, this is an isolated event,” said Dimon. He said the bank was making progress in risk reduction under the leadership of Matt Zames. “Hopefully, by the end of this year, we don’t talk about this anymore.”
Dimon also stuck to many of his views on the Volcker rule, emphasizing that market making is critical and that regulators need to “do it right” and not “throw out the baby with the bath water.”
On a broader note, Dimon acknowledged the deeper worries in Europe, adding that the prospect of Greece’s exit from the Euro zone was a key risk. But the bank remained committed to the region.
– Written by Shanthi Bharatwaj in New York
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